Standard & Poor’s Ratings Services (S&P) on Wednesday lowered its natural gas price assumptions for the U.S. Henry Hub market point covering this year, 2013 and 2014 (and thereafter). The changes assume prices will go no higher than $3.50/MMBtu for the foreseeable future.
Oversupply of natural gas looks like an inevitability throughout 2012, but S&P’s report predicts that there will be some turnaround in prices next year when declining drilling for dry gas and the high decline rates in some shale plays begin to be felt. The ratings agency said it does not expect the lower price assumptions to affect many operators’ credit ratings.
S&P’s report kept oil price assumptions for the same period unchanged. In a separate report also released Wednesday looking at U.S. exploration and production (E&P) companies, S&P concluded that the sector generally is drawing stability from high oil prices, and thus most E&P operators are keeping their relatively strong credit ratings. A few, such as Chesapeake Energy Corp., have moved to “negative” outlooks.
The lowered assumptions across the board for gas prices follow what S&P analyst Paul Harvey called “the continued drop in spot and futures prices as growing production and storage levels continue to outstrip demand.”
Lowered assumptions call for $2/MMBtu at Henry Hub, compared to the rating agency’s earlier $3 assumption for this year. For 2013 the price assumption dropped to $2.75, compared with $3.25 earlier, and for 2014 and thereafter, S&P moved the price to $3.50, compared to an earlier $4 assumption. In those same years oil prices have stayed at $85-100/bbl this year; $80-90 next year, and $75-80 for 2014 and beyond.
Separately, Barclays Capital Research’s mid-April gas price analysis further lowers estimated gas prices this year, dropping to $2.05/MMBtu in the third quarter before rebounding to the $3 level in the fourth quarter with the advent of the new heating season. For subsequent years, Barclays stuck with its earlier projections for $3.25 in 2013. rising to $4 by 2015.
Citing real fears of storage capacity being exhausted before the start of the heating season in November, Barclays said it expects “that price weakness this summer will cause the entire price curve to sag,” but ultimately after a string of monthly production declines the market will “brighten” by the end of this year. Although it is not revising its projected prices for 2013, Barclays said it sees “the fundamentals point to more upside than downside risk” next year.
“Prompt-month prices have declined 34% to about $2/MMBtu since the end of last year, and they are down approximately 53% from a year ago,” Harvey said. With an exceptionally mild winter throughout the nation, continued robust domestic gas production through the shale plays and record storage levels nearly 60% higher than a year ago, prices have nowhere to go but down, S&P said.
“Natural gas production nationally increased to a record 69.52 Bcf/d in March this year,” Harvey said. “The outlook for U.S. prices the rest of 2012 remains bleak.”
For this year, S&P speculated that the situation could get worse, particularly if natural gas inventories reach total industry capacity. With this situation S&P thinks there could be involuntary production curtailments spurred by “a prolonged period” of extremely weak gas prices this year.
S&P’s report lists the usual factors driving the oversupply conditions, such as production exceeding expectations, substantial associated gas production and working through uncompleted wells, but it adds three others:
In the E&P ratings and oil price report, S&P said the most recent forecasts on WTI crude at about $104/bbl bode well for E&P companies generally that are focused on oil. It also could bump up E&P spending that would in turn bolster oilfield service companies and drillers.
“We believe that as long as oil prices remain healthy and natural gas prices stay weak, E&P companies will continue to allocate an increasing amount of capital spending toward their oil and natural gas liquids drilling,” said S&P.
Currently, S&P rates 67 E&P companies with about half of them in the “B” ratings category. Nearly eight in 10 of the E&Ps have stable outlooks, the report said.
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