Pour more water on the flame lit by the shale gas explosion in the United States, analysts with Deutsche Bank Securities Inc. said this week. There's just too much gas for the world markets to handle, said the bank's oil and gas team.
Deutsche Bank's 87-page analysis is detailed in "Global Natural Gas -- Battlefield Analysis," which was issued to clients on Monday. What analysts found is that the United States has become an "island" gas market with a negative outlook. Expectations for U.S. gas prices in 2011 were cut to $4.50/MMBtu on "downside risk" because more liquefied natural gas (LNG) imports (2.5 Bcf/d-plus) are expected to hit U.S. shores in the coming year.
"Much will depend on the behavior of Qatar in bringing LNG into the market, but our view is that volumes are highly likely to arrive," said the team. "The simple conclusion, given the lack of price elasticity of U.S. gas demand, is that excess high-cost production must shut in."
The global gas market is "fragmenting and differentiating." There's "too much gas supply and not enough demand, with low price elasticity of both," which equals a "fundamentally bearish outlook for prices." Even with LNG-implied links, gas markets are "re-regionalizing" because of fundamental contract/market differences.
"The unconventional gas game-changer now requires a demand response that is dependent on Washington, DC, to formulate either a comprehensive energy or CO2 [carbon dioxide] policy. But with 90% estimated chance of a Republican House, expect supply-friendly, unregulated demand rhetoric."
Deutsche Bank analysts said the U.S. "outperformers" will be companies "with either a bias toward oil, or a gas portfolio focused on oil-price-linked Asian/Middle Eastern LNG. The less well positioned companies will be those with a large exposure to the marginal U.S. gas plays."
Take, for instance, ExxonMobil Corp. (XOM), which now is the No. 1 North American gas producer with its purchase of onshore shale heavyweight XTO Energy Corp. The major's ratings were cut to "hold" by the analyst team.
"In the near term, we are bearish on the price of both oil and gas, and XOM is the most defensive name in the group," said analysts. "Having said that, the overhang from the XTO acquisition will likely remain a major drag on XOM, and may persist until the U.S. natural gas market normalizes sometime beyond 2012.
"XOM has and will always operate with an eye to the (very) long term. They see a future where demand is increasingly gassy, and thus made a major move into U.S. unconventional gas."
Because it's a "natural consolidator and efficient operator," XOM may drive out the higher-cost exploration and production companies and "be the major U.S. gas player over the long haul. But over the medium term, U.S. gas prices will be under pressure, as a wave of LNG adds to an already bearish domestic dynamic, and XTO returns are therefore likely to remain low and highly dilutive to overall XOM returns."
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