The U.S. energy sector is "at the cusp" of a structural shift, boosted by abundant shale gas and liquids, developing scarcity in domestic coal and the never-ending quest for oil, FBR Capital analysts said in a new report.
In "Energy 2011 Outlook: Structural Shifts Unfolding," FBR Capital's Robert MacKenzie and his team looked ahead to 2011 and said the "shale experience and rejuvenation of conventional exploration globally are driving a new reserve discovery cycle. We term this discovery cycle the 'real' energy super cycle..."
FBR Capital estimates that since 1950 1,000 Tcf has been discovered in the United States, and another 1,000 Tcf is "yet to be discovered." About 160 billion boe of conventional oil also has been produced from the Lower 48 since 1900, and "another 160 billion boe of liquids is yet to be discovered from liquids-oriented shales and tight oil reservoirs..."
Adding to the onshore energy bounty, the analysts said close to 50 billion boe is estimated to have been produced from U.S. deepwater subsalt formations from one-half of the acreage since 1950. "We believe that U.S. deepwater subsalt could yield 50 billion boe of reserves. And the shale concept will go global, and a global exploration renaissance is currently under way."
The estimated oil and gas reserves in turn are driving big investments today in "liquid-rich plays," which are pushing demand for U.S. land services, MacKenzie said, particularly for long horizontal wells.
"We believe many investors are currently anticipating the U.S. land services market to peak in 2011. On the contrary, our supply/demand analysis suggests that the U.S. fracturing [fracking] business will remain healthy as the drop in U.S. dry-gas-basin rig count will be offset by increased investment in liquids-rich plays..."
The land services market may "surprise investors, which are currently anticipating the market to peak," he said. "Our supply/demand analysis suggests, however, that the market will remain healthy through 2011 and increase into 2012.
"The debatable point is how much increases in the oils/liquids activity can offset potential gas activity decreases; specifically, oil prices over $80/bbl are promoting strong investment, but gas at $4/Mcf has limited economics. We expect that supply growth of 32% in 2011 and 21% in 2012 will be absorbed, and we believe there will actually be a shortage of horsepower in 2011."
FBR Capital expects the average horizontal rig count in 2011 will be 1,004, with 14,156 horizontal wells drilled. The current excess backlog of wells to frack is estimated at about 2,000; the backlog at the end of 2011 is forecast to be 3,305.
Fitch Ratings analysts offered no comfort to gas producers in their 2011 outlook for North American E&Ps, trimming their 2011 base case price deck for gas (Henry Hub) to $4.00/Mcf from $4.75. Oil prices are expected to be higher at $75/bbl from $67.50.
"Fitch continues to expect North American natural gas-focused E&P companies to under perform peers with higher oil and liquids exposure due to the large discrepancy in pricing for the two commodities, which is expected to persist during 2011," said Adam M. Miller and his team. "At this point, few indicators point to a resurgence in natural gas pricing, which would likely require a sustained improvement in demand combined with an industry-wide reduction in natural gas focused drilling."
Fitch analysts said 2011 will continue several trends that were strong in 2010: high levels of merger and acquisition activity, strong liquidity for oil-focused companies, the potential for borrowing base redeterminations for small natural gas-focused companies, rising costs, regulatory uncertainty related to the Gulf of Mexico as well as shale drilling, and increased share repurchases/dividends for the integrated and large upstream producers.
"Additional regulatory uncertainty pertaining to onshore shale-based drilling remains a modest concern for the sector," said Miller. "It is currently unclear if the newly elected Congress will address this issue in 2011."
In their recent report, Credit Suisse analysts Teri Viswanath and Stefan Revielle said they believe domestic gas production won't begin to turn lower until 2012 because producers have to reduce their drilling and they have a "sizeable" unconnected well inventory to complete.
"Under these conditions, it is possible that pipeline imports might actually stage a slight recovery to meet rising demand," said the duo. "However, there is also the possibility that the decline in domestic production will be lower than we anticipate, which would reduce the call on imports.
"In our view, 2013 will likely prove to be the turning point for supply/demand balances as new regulations proposed by the U.S. Environmental Protection Agency should begin to influence gas demand through a combination of early coal plant retirements and/or coal plant environmental retrofits." Federal policies "will amplify demand through the balance of 2015, enabling prices to recover, which in turn will reaccelerate domestic production growth."
Motley Fool's Toby Shute also offered his take on what's ahead for U.S. energy markets in 2011.
"Gas is trash today, but there are some reasons to believe we'll see some relief in the year ahead," said Shute. "Three-year leases originating in the land grab of 2008 will be satisfied, allowing producers to dial back on their drilling commitments in places like the Haynesville and Marcellus.
"Constraints in frack equipment, natural gas liquids processing and pipeline capacity may keep a lid on activity in various plays. Hedge books will roll off, exposing producers to lower prices. The ongoing permitting purgatory will choke offshore supply growth."
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