An analysis of natural gas market and gas patch dynamics by analysts at Standard & Poor’s Ratings Services (S&P) yields little reason to be excited about dry natural gas production. And ongoing low natural gas prices won’t be much of a catalyst for opportunistic mergers and acquisitions (M&A), one S&P credit analyst said Wednesday.
North American gas production is expected to hold flat or be down slightly over the next 12 months, S&P said, adding that there are “few catalysts for a pick-up in demand.”
Gas prices are likely to remain below $4.00/Mcf in 2013 unless the supply-demand dynamic changes significantly, S&P said in a recent report. Prices have rebounded 88% since April to about $3.45/Mcf on the New York Mercantile Exchange (Nymex) from $1.84/Mcf. And the forward 12-month Nymex strip now averages $3.23/Mcf, up from $2.56 in April.
“Although prices have gained some lost ground, they remain substantially lower than before the economic crisis of 2008. Gas is now more abundant and industrial and commercial demand is stagnant,” said S&P credit analyst Ben Tsocanos.
Of course, E&P companies have been pulling rigs out of dry gas plays for a while now in order to focus on liquids-rich gas and especially oil. “Production, however, has not fully reflected the effect of the shift, and we expect 2013 gas output in the U.S. to be about the same as this year’s, even though the pace of drilling new gas wells slowed,” S&P analysts said in a report.
During a conference call with a handful of his fellow analysts, Tsocanos said gas prices have been a victim of the drilling successes seen across multiple shale plays. While the gas market has delivered some volatility this year, the ground gained by natural gas prices isn’t enough to draw drillers back to the dry gas plays, he said. To bring drillers back, prices around $4.50/Mcf are generally needed, Tsocanos said.
Even with the drop in dry gas drilling, November production in the United States was the highest of the year, Tsocanos said, thanks largely to improvements in drilling and completion technologies and practices.
One might think low gas prices would stimulate some activity on the M&A front, but Tsocanos said this isn’t likely as industry players tend to be acquirers when prices are on the rise rather than when they’re static or declining; in other words, their buying is cyclical rather than counter-cyclical. “I don’t know that a prolonged period of lowish gas prices is going to spark an M&A wave except to the extent that companies are distressed,” he said.
Putting North American gas prices in a global context, S&P credit analyst Andrew Wong said in a report that the gulf has widened between Henry Hub and the rest of the world, particularly Asian markets.
“The divergence reflects underlying regional market fundamentals, such as excess gas supply in North America, rapid growth in gas demand in Asia at a pace faster than the global average, and constrained gas supply in Asia from maturing fields,” the S&P report said. “This has seen a widening gap between Asia-Pacific natural gas production and consumption. Standard & Poor’s believes that natural gas consumption is likely to continue to grow, particularly in Asia. At the same time, domestic gas supplies will remain constrained and the use of imported gas, namely LNG [liquefied natural gas], will increase.”
It’s no secret that numerous projects have been proposed in the United States and Canada to capture some of the spread between North American and global natural gas prices. For the short term, LNG producers should benefit, but they face risks just a few years out, Wong said.
For one thing, Australia is ambitiously growing natural gas liquefaction and export capability, and the United States is right behind it, both with an eye to serving markets where domestic supplies could develop in coming years from shales and coalbed methane.
“We expect liquefied natural gas producers to maintain favorable pricing power for the next few years, given tight LNG supplies and the forecast for demand outpacing new liquefaction capacity until at least 2014,” Wong said.
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