NGI The Weekly Gas Market Report / NGI All News Access

Gas Price Collapse Leading to 'Armageddon Quarter' for Producers

December 7, 1998
/ Print
| Share More
/ Text Size+

Gas Price Collapse Leading to 'Armageddon Quarter' for Producers

The gas market showed last week it was fed up with low crude oil prices getting all the attention. In a market swing that was nothing short of unbelievable, gas prices collapsed to near historic lows for a week in December. Spot prices at the Henry Hub plummeted to $1.01/MMBtu on Friday and averaged $1.32 for the week, down 64 cents from the week prior. Spot prices at a number of other locations in Louisiana and Texas fell below $1 on Friday.

Most of the nation sweated through Christmas shopping trips last week as temperatures reached record highs in at least 30 major cities. Meanwhile, gas suppliers struggled to find places to put their gas. Storage levels already are at record highs for this time of year, according to the American Gas Association, and are 471 Bcf higher than they were at the same time last year. AGA reported a net 8 Bcf injection last week for the week ending Nov. 27, and there's a strong likelihood it will report another injection this week.

With prices so low and storage so high, there was a strong incentive last week to "hide gas" by socking it away amid pipelines' linepack. As a result, linepack reached critical levels and at least six interstates were forced to issue operational flow orders.

"Gas prices have plummeted, and there is no place to store gas, no place to arbitrage gas and as a consequence we have the end of civilization as we know it," quipped John Olson an energy analyst for Sanders, Morris and Mundy. On a more serious note, Olson said this will be an "Armageddon quarter" for producers because of warm weather, overloaded storage, $11 crude prices and SEC mandates to revalue reserves, not to mention commercial bankers demanding more collateral or asset sales. "This is bad news. This is also reflected in the fact that oil well drilling is down 47% this year and gas well drilling is running 20% lower than last year because nobody has any money," said Olson. "Producers didn't even replace their production last year. They're not going to come close to doing it this year.

"The consequences are that we are going to bring on the recovery sooner rather than later. The faster we go down, the better off we'll look," he said.

"But there are a lot of producers right now in intensive care. A lot of people are struggling. .I think we are in for a shake-out of some major dimension. The small undercapitalized producer is indeed at risk."

Donato Eassey of Merrill Lynch said he would expect the marginal E&ampP players to "just implode and sell themselves to the highest bidder they can get." He sees "potential bankruptcies and the whole bit in the January-February timeframe" if gas prices don't improve soon. "You've got to have weather show up or it's going to be 'Katie, bar the door.'"

While the pure E&ampP companies are getting hit hard, however, this could be a "home-run opportunity" for companies like National Fuel Gas, Questar, Coastal and Columbia Gas, said Eassey. They are both utilities and E&ampP players and generally have high credit ratings so banks are "flocking to them like crazy," he said.

The major winners will be the "energy conglomerates, which used to be called the pipelines," Olson agreed. "These people have tremendous surplus cash flow, good pipeline profitability through thick and thin, high-quality earnings and a necessity to grow by acquisitions. They are in the driver's seat [of the production cycle] because they're the people that have all the money that can bail out the producers on favorable terms. They can get a call on gas and control the flow of the supply, and that's the name of the game." Both Olson and Eassey agreed the diversified energy companies are likely to jump in soon and start buying up significant properties and smaller E&ampP companies.

If crude prices persist at subterranean levels and gas prices don't recover in the next 30 days, Olson said, the "shake-out" will begin to develop. "You will see mergers to enhance business profiles, like Seagull and Ocean Energy, or mergers of necessity of smaller guys or outright cash sales. I would have to say a [significant number of them]."

PaineWebber analyst Ron Barone noted that compounding the problem this quarter is the comparison with the fourth quarter of last year, which was colder than normal. But he's optimistic weather will change soon, possibly as soon as this week, and gas prices will recover quickly.

"Personally I don't think this is going to last very long for two reasons: first it is supposed to get colder next week according to the National Weather Service and the Weather Channel, still above normal, but much colder than now with daytime highs [in New York City] near 50 as opposed to the 70 degrees that it is now. The other reason is if prices stay this low, producers are going to start to shut in. If they get to $1.60, producers start to run their economics, and it's well below $1.60 now. Some discretionary production will be withheld from the market if prices stay this low for an extended period of time." Barone predicted shut-ins will start to occur if prices stay in the low $1s/MMBtu for two weeks, which he thinks is unlikely because of colder weather approaching.

However, several Louisiana producers confirmed last week they already started curtailing production.

Curt Launer of Donaldson Lufkin and Jenrette Securities sees little long-term impact from this gas price crash mainly because few companies sell short-term spot gas anymore. "A lot of companies have hedged production," he noted. "A lot of companies have sold out in the bidweek period for the month of December, same thing for January. So lets not overreact to the weekend spot market, which is so far below the futures screen.

"You're talking about the weekend market right now. Somebody is selling that gas just the same way that somebody paid $7,000 for a megawatt hour in June. That's the equivalent volumes we're talking about. It gets a tremendous amount of press and it really is happening, I'm not denying it, but it's not the kind of thing that will swing the annual average price or any particular company's realized price by anything more than a loss in the rounding."

Launer failed to note, however, the power price spike in June, significantly impacted the earnings of several companies, some of which were forced to close down marketing operations and take huge losses for the quarter.

A Coastal Corp. spokesman, however, supported Launer's first point, noting that the company already has hedged all of its production for December and has no plans, and sees no reason, to consider production curtailment.

Rocco Canonica

©Copyright 1998 Intelligence Press, Inc. All rights reserved. The preceding news report may not be republished or redistributed in whole or in part without prior written consent of Intelligence Press, Inc.

ISSN © 2577-9877 | ISSN © 1532-1266
Comments powered by Disqus