With an eye on U.S. natural gas storage and wholesale price levels, senior executives at intermediate Alberta oil/gas producer Perpetual Energy Inc.on Tuesday were unabashed in their hopes for some upward movement in natural gas prices as they reported indicators going the other way as part of a year-end 2010 and fourth quarter earnings conference call.
Perpetual reported losses for 4Q and all of 2010 ($19.8 million and $28.5 million respectively) compared with a smaller 4Q2009 loss ($11.2 million) and net profits for all of that year ($14.3 million).
Nevertheless, CEO Susan Riddell Rose said Perpetual's natural gas price hedging program combined with "strong operating results" led to a solid corporate funds flow for the year ending 2010 despite what she called "extremely weak natural gas prices related to high gas storage levels and concerns about new supply."
"We're not spending a lot on our conventional assets due to just working to offset declines as best as possible with most of our capital being directed to strategic initiatives," Rose said.
CFO Cameron Sebastian said Perpetual continues to see "more upsides than downsides" to wholesale gas markets in North America, citing some trends in storage levels and futures prices in the United States. "We think we are beginning to see producer sentiment shifting as rigs and capital most certainly are being diverted to oil and liquids plays in Western Canada. The cold weather of 2010-11 has been very helpful as we are likely to enter the withdrawal season again in March at about 1.5 Tcf of storage in the United States, and that is down more than half a Tcf (0.5) from the predictions we saw prior to Christmas."
The storage deficit year over year entering March represents about 2.5 Bcf/d of demand that will be required for injection in the summer, and the cash and futures prices will be much stronger, Sebastian said.
With the increasing displacement of coal demand with natural gas for power generation, there is another longer term development that Perpetual is watching regarding future gas supply/demand and pricing developments, Sebastian said. What he called a "dramatic migration of services" is now taking place from gas to oil and liquid plays.
In the United States, a 77 Bcf gas storage withdrawal was expected to be reported for the week ending March 4 by the Energy Information Administration, according to a report Tuesday from Credit Suisse, which added that the withdrawal for the same week last year was 112 Bcf, and the five-year average for the period is 103 Bcf. In addition, heating demand decreased by 16% week over week in the period ended last Friday.
Sebastian said Perpetual has seen the market share in power generation for natural gas more than double during the past 15 years, and "certainly we expect to see that trend continue throughout North America."
Rose said if gas prices do actually move through what she called the "bottom of the price cycle" this year, Perpetual has "tremendous leverage" to take advantage of an uptick. "A 50-cent change in gas prices equates to $25 million in added cash flow for us," she said. "Our view is that in the next two months we will see some upswing in gas prices. If we don't see that happen, it is going to be a hard world to carry on with all of the growth projects we have in front of us. Our hope is that we will see some recovery in gas prices and get us through until the time when the liquids will begin to kick in and generate some cash flow."
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