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Why Going "Naked To The Strip" Means More Pain For Nat Gas Companies

Tyler Durden's picture




 

By Martin Katusa of Casey Research

Which Stocks Will Lose the Most in the Coming Energy Bloodbath

Yesterday, I made a prediction that should scare a lot of investors.

I predicted a massive loss in market valuation for some of North America's largest energy producers. You might own some of these names yourself.

I'll share some specific names with you in a moment... But before we cover them, it's important you know the dynamics that will drive them lower.

I covered the first dynamic yesterday. It's called "reserve write-downs." 

As you probably know, the price of natural gas has collapsed more than 60% over the past 12 months. Energy firms that carry billions of dollars of reserves on their books based on the "old" prices (around $4 per MMBtu) will have to "write-down" the value of those reserves to reflect the new prices (below $2 per MMBtu).

Natural gas reserves that were "economically recoverable" – and thus, extremely valuable – when natural gas traded for more than $4 per MMBtu back in 2010 are going to be worth much, much less... now that natural gas is below $2 per MMBtu.

The second dynamic involves "hedging." 

Hedging is when one party agrees to sell a commodity to another party at a particular price in the future. This strategy helps commodity producers and consumers know in advance what their price of a given commodity will be. It gives both parties a greater ability to plan for the future.

For example, a farmer might agree to sell his corn for $6 per bushel before he even harvests it. Or an oil producer might agree to sell his production for $100 per barrel. This gives the farmer and the oilman the certainty they need to run their budgets. Even if the prices of their given commodities fall, both the farmer and the oilman are protected from price declines. They've "hedged" their production.

Hedged natural gas contracts have protected many producers from the full wrath of today's rock-bottom prices. They've been able to sell their production at relatively high prices... even while the spot price collapsed.

But... for a lot of producers, these higher-priced hedges are about to expire.

Encana, Canada's largest natural gas company, is a good example. The company had prudently hedged lots of the gas it sold over the last six months. This means it was still realizing $4 or $5 per MMBtu on its sales. Now, those hedges are expiring... and the new hedges are at much lower prices. Encana's cash flow and its economically recoverable reserves are going to plunge.

Encana isn't the only natural gas company in this situation.

In recent months, the second-largest natural gas producer in the U.S., Chesapeake Energy, removed most of its gas hedges for 2012 and 2013 based on the belief that prices are at or near a bottom.

Such a move, known as going "naked to the strip," marks a major turnaround for a company that was one of the best and most active hedgers in the sector. Now, Chesapeake has no protection if gas prices continue to slide. It's a risky scenario seeing as prices are currently below production costs in most U.S. gas basins.

For investors, the fact that many North American gas producers are seeing their high-priced hedges expire makes it more important than ever to understand a company's cash flow picture going forward.

An investor must ask the following questions...

  • What percentage of production remains hedged and at what price?
  • How much will a company have to sell at or near the spot price?
  • What is the company's average cost of production?
  • Is the loss of high hedges about to send the company into the red?

These are the questions you need to ask... But be warned: you won't find very many producers with pretty short- and medium-term cash flow pictures.I expect natural gas prices to remain between $1.50 and $2 per MMBtu for the next 12 months.

Those prices will render a lot of production uneconomic. They will force companies to massively write down the value of their reserves. Cash flows will plummet. Shares in gas producers, while down a lot over the past year, will fall more than 25%.

The bloodbath in natural gas stocks is about to get worse.

 

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Sat, 05/12/2012 - 17:24 | 2420283 ihedgemyhedges
ihedgemyhedges's picture

If you had inserted the word "landing" before the word "strip", you would've piqued a lot more interest.................

Sun, 05/13/2012 - 02:11 | 2420770 Oh regional Indian
Oh regional Indian's picture

I suppose the nationalization of the energy complex/grid is one of the top-most priorities of controllers, ne? Stands to reason.

You can ration something only when your hand's on the tap and the source.

I predict a wave of bail-ins for the energy complex and then....before you know it, not slight, just handy.. Gub owns the network, which may or may notwork, depending.

ori

sifting-the-sands-of

Sun, 05/13/2012 - 05:12 | 2420817 French Frog
French Frog's picture

Just a thought: is NG's fall from the 2008 high due to simple supply & demand or ... is the Oil Cartel around the world simply defending its life by shorting NG to make sure that oil remains the 'top dog' !?

---> short NG (with all the profit/money made from high Crude/Brent prices) ---> NG price goes down ---> extracting NG becomes not viable ---> NG companies go bust ---> less NG gets extracted ---> price goes up again to a level that makes it uncompetitive with Crude ---> the Oil Cartel wins again.

Surely not ?

Sun, 05/13/2012 - 09:29 | 2420939 Pinto Currency
Pinto Currency's picture

 

There has been a surplus of nat gas produced from shale and conventional field and there was less nat gas used this past warm winter.

Replacement wells aren't being drilled and current wells are being shut-in because of low prices (Chesapeake) thus starting to limit supply.

Gas inventories are starting to narrow and the market will find its new economic equilibrium price point given additional shale gas feed but likely after some substantial whipsawing.

http://ir.eia.gov/ngs/ngs.html

http://www.testosteronepit.com/home/2012/5/2/havoc-and-opportunity-in-natural-gas.html

Until substantial new demand comes on-stream it will likely continue to trade at a substantial btu discount vs. oil but ultimately seeking a price above $2.50 per tcf to sustain production.

 

Sat, 05/12/2012 - 17:17 | 2420286 lolmao500
lolmao500's picture

What if... I know this is crazy... converted lots of cars to natural gas?? If Iran, a third world country is able to do it, why not the west? Oh yes, the western governments are owned by big oil...

Sat, 05/12/2012 - 18:10 | 2420323 Flakmeister
Flakmeister's picture

Take off your metal collander hat or at least loosen the straps...

Try the following, ramp up an assumed 0.1% NG use for vehicles by 100% p.a., compute the corresponding displacement of oil taking into account a 23 year  proven reserve of NG (yes, that takes into account the shales)

Sounds like a Soviet Five Year plan....

That being said, the Repubs are thralls to the Big Oil and in particular the Kochs.... Hell T. Boone called out the Kochs for what they are recently

http://articles.businessinsider.com/2012-05-02/markets/31537067_1_energy-plan-koch-industries-koch-brothers

 

Sat, 05/12/2012 - 19:14 | 2420385 Caviar Emptor
Caviar Emptor's picture

Yup. And none of the "projections" ever address the huge infrastructure costs to safely and effectively process, distribute, store and retail NG. Buildout would be costly and lengthy. Automakers would take advantage of the change to gauge on price of new "gas-o-matic cars". Better be sure you'll have enough to make it to the next NG filing station. Want to see what happens in a rear end collision

Sat, 05/12/2012 - 20:36 | 2420434 Bicycle Repairman
Bicycle Repairman's picture

There's a natural gas filling station near you.  And this is the 12th time I've told you guys this.

http://www.gonaturalcng.com/parts/cng-fueling-station-a-prices-locator.html

I have a natural gas "fill pipe" in my home already.  Anyone with natural gas heat has one.

Sun, 05/13/2012 - 09:41 | 2420956 Pinto Currency
Pinto Currency's picture

www.Westport.com

The Westport Innovations technology is going to be offered in F-150 and F-250 trucks this quarter and fleet truck and bus operators are starting to use the technology.

With this home filling device you can fill your auto in your home for less than $2.00 per gasoline gallon equivalent:

http://www.autoobserver.com/2011/03/brc-fuelmaker-again-selling-phill-home-cng-fuel-station.html

Cummins-Westport shipped 1,943 truck and bus engines this past quarter - the demand is building from fleet bus and transport truck operators who see substantial price benefit from fuel savings.  Retail will follow with a sustained stable price differential.

http://www.westport.com/news/2012/westport-reports-first-quarter-fiscal-2012-quarterly-revenues-up-133-year-over-year

 

Sun, 05/13/2012 - 13:37 | 2421501 azlibertarian
azlibertarian's picture

And how much would an interested buyer pay for this home filling device--the required infrastructure--in order to be able to access this $2.00gge home-filled CNG? I understand they're $6k or so (and I'm willing to be wrong here), but when you factor that cost into a cost/benefit decision, over the lifespan of a CNG vehicle, these benefits aren't quite so compelling.

Sun, 05/13/2012 - 14:14 | 2421552 Pinto Currency
Pinto Currency's picture

 

Yes, it depends how much you drive.

Nat gas costs about $1.50 per gasoline gallon equivalent from a home filling station so it depends how many gallons you use saving $2.00 to $2.50 each gallon.

Maybe split one with a neighbor.

It sure would work for industrial fleet vehicles that put on a lot of miles.

You could always stick with a retail nat gas filling station at about $2.50 per gasoline gallon equivalent.

Sun, 05/13/2012 - 20:01 | 2422368 Bicycle Repairman
Bicycle Repairman's picture

$6K seems way too high.

Sun, 05/13/2012 - 21:36 | 2422487 azlibertarian
azlibertarian's picture

Perhaps $6k does sound high, but I have a little, although distant experience here. I own a bi-fuel (gas and CNG) truck that I bought back in '99 under a program that Arizona was offering at the time. I didn't buy a home-fill unit then, but they had plans for these home fuel stations as part of the incentives to get motorists into alternative fuels. My $6k figure comes from my memory of what they were asking then (and again, I could be wrong on that).

But the math stays the same.

Let's make these assumptions:

  • The system costs $4k (not $6k, as per my memory)
  • I drive 10,000 miles per year
  • My mileage is 20 mpg.
  • Gasoline is $4/gal.

So, at 20mpg, I buy 500 gallons of gas a year. With gas at $4/gallon, I spend $2000/year on gas.

If I can pump CNG from my home fill unit at $2/gge, then I am saving $1000/year on fuel.

So, it will take me 4 years until I've recouped the cost of this home-fill unit.

Obviously, a higher price of the home-fill unit will move that break-even point further out, and your mileage will affect the math too (I get virtually the same mileage on CNG as I do on gas). If you have more than one vehicle using this one home-fill unit, then you'd break even earlier.

But the point is: the cost of the system has to be included in the decision on whether it is worthwhile to get into an alternative fuel.

Mon, 05/14/2012 - 09:54 | 2423441 Pinto Currency
Pinto Currency's picture

 

Or  you fill nat gas from a local nat gas station at $2.00 - $2.50 per gasoline equivalent gallon.

Consider also the price divergence of nat gas and oil prices due to the surge in gas production from shale gas - that spread will increase as oil continues its climb.

Sun, 05/13/2012 - 09:52 | 2420968 MarcusLCrassus
MarcusLCrassus's picture

But what kind of performance issues to NG cars have?  Reduced hp and torque = shit performance = less buyin from the public.  Count in the costs of conversion as well as maintenance infrastructure and NG powered cars have a real hurdle to climb. 

Sun, 05/13/2012 - 15:31 | 2421760 flyingpigg
flyingpigg's picture

It makes more sense to apply NG for busses instead of cars. They have the tanks on the roof. Refilling at the overnight bus station. Many cities in Europe already have NG busses. Better air quality as well (compared to the usual diesel busses).

Sat, 05/12/2012 - 20:25 | 2420445 Bicycle Repairman
Bicycle Repairman's picture

Lets just offer the NG car.  People will buy it.  As for 23 yeaqrs worth of reserves, how many years of reserves did we know of 10 years ago?  And even if it is 23 years, you can mail that to 2035 when we'll care.

Sat, 05/12/2012 - 18:30 | 2420343 css1971
css1971's picture

And your timescale is?

Sat, 05/12/2012 - 19:00 | 2420373 lolmao500
lolmao500's picture

A few years? If they wanted, they could roll out these next year just start the propaganda now...

Sat, 05/12/2012 - 19:06 | 2420377 Flakmeister
Flakmeister's picture

NG will work for short range commercial fleets and for a few people with unusual circumstances.... As a general transportation fuel... fuggedaboutit...

Sat, 05/12/2012 - 20:22 | 2420438 Bicycle Repairman
Bicycle Repairman's picture

Natural gas will work for any automobile and there are kits to convert gasoline burning cars.  Honda makes an NG car.  Good luck getting one in the land of mandatory gasoline cars.

Sun, 05/13/2012 - 10:23 | 2421020 Gully Foyle
Gully Foyle's picture

Bicycle Repairman

http://usnews.rankingsandreviews.com/cars-trucks/best-cars-blog/2011/10/...

Ford Super Duty Trucks to Offer Natural Gas Fuel Option

01:04PM Oct 03, 2011

According to AAA, the price of gas remains about 71 cents higher than at this time last year, which hurts anyone who drives a fuel-thirsty pickup truck for work or play. Fortunately for potential truck buyers, Ford recently announced that 2012 Ford Super Duty pickup trucks will offer a $315 setup kit to convert the base engine to run on compressed natural gas, rather than gasoline.

The F-Series Super Duty trucks already come standard with a 6.2-liter V8 engine that can burn either standard gas or E85 ethanol fuel. However, engines run far less efficiently on ethanol, which raises the annual cost of fuel. For instance, the EPA estimates that owners of a 2011 Chevrolet Suburban with four-wheel drive will spend about $3,100 on gas annually, while they would spend about $3,800 on ethanol annually.

Ford’s addition of a natural gas fuel option is good for shoppers because it will also save them money over diesel fuel. “Natural gas typically costs up to 50 percent less than diesel fuel on a per-gallon basis,” reports Automotive News.

A compressed natural gas conversion kit option is already offered on the Ford E-series and Transit Connect vans, even on models with a four-cylinder engine. Though the conversion setup is included in the $315 package, non-fleet buyers will have to purchase a separate compressed natural gas system and have it installed themselves. Shoppers can find kits for about $1,200 on eBay, and can buy natural gas at some gas stations.

Sun, 05/13/2012 - 11:21 | 2421117 Herkimer Jerkimer
Herkimer Jerkimer's picture

I watched these MF'ers run around Canada in the early 00's and scare the bajezus out of everyone, getting them to sign up into long-term contracts with NG for their homes.

 

It was all a setup. The big gas companies knew these lower prices were coming with fraking technology. Somebody should investigate for the collusion.

 

Anyway, I thought I'd like to get a big NG tank for my home, as I'd like to have a supply that I can purchase to control the cost. And get it refilled, in July, not January, like they like to do... The NG suppliers tell me that that won't happen because you can't compress NG like Propane. Ha-ha! You're screwed Herk!

 

How come I can now get NG for my vehicle? What happened with the No Compressy Gasy Excuse? What am I doing? Driving around with a big hose attached to my car?

 

I think it's probably got something to do with the same idea that I can't buy a 300 gallon drum of gasoline without jumping through hoops of fire with vats of hot bullshit underneath, so I can't buy gas when it drops to 60¢ a litre like 2009, as I'd like to have 2 1000 gallon tanks of NG at my house, at $1 rather than 5 dollars MMB.

 

Screwed again.

 

•J•
V-V

Sun, 05/13/2012 - 13:01 | 2421407 sun tzu
sun tzu's picture

Who is stopping you or anyone else from buying an NG car? Go to any Honda dealership and buy one or order it. They only cost 40% more than a regular Honda Civic.

Sun, 05/13/2012 - 19:59 | 2422363 Bicycle Repairman
Bicycle Repairman's picture

"They only cost 40% more than a regular Honda Civic."

That might be your answer there, except that there is no reason for the much higher price.

BTW, your avatar sucks.

Sat, 05/12/2012 - 22:37 | 2420579 Teamtc321
Teamtc321's picture

It's just amazing how un-educated your comment is, diesel engines, our transportation fleet is switching now. Google clean energy and the picken's plan to start.

Any internal combustion engine, diesel or gas will run on nat gas. The engine will also produce way better fuel mileage thus dropping the price per gallon per se. 

Sun, 05/13/2012 - 09:35 | 2420951 Flakmeister
Flakmeister's picture

It has to do with the infrastructure...

And you do realize that the US still imports NG on a net basis? Do you?

I predict a lot of people spending the money to convert and install the compressor getting burned when NG returns to historical pricing... They will never recoup their CAPEX (hence my comment above that NG will work for some but it is by no means a universal solution)

 

Sat, 05/12/2012 - 17:20 | 2420287 disabledvet
disabledvet's picture

Eh. Exxon Mobil will crush them far worse than any "failed hedge." change we no longer can believe in here we come!

Sat, 05/12/2012 - 17:25 | 2420289 Sudden Debt
Sudden Debt's picture

And this will create lower production which will cause higher prices and that 12 month timeframe will be worthless.
Try 3 months before commodities start to boom back up

Sat, 05/12/2012 - 17:37 | 2420296 Tyler Durden
Tyler Durden's picture

Indeed. However as gold has shown, there is a big difference in price dynamics between miners/extractors and the underlying commodity. As for capitalization considerations, see this.

Sat, 05/12/2012 - 18:15 | 2420332 Spitzer
Spitzer's picture

Gold is not a commodity that gets consumed. Gold has 70 years worth of stock to flow, most commodities have 70 days worth of stock to flow.

The reason gold is rising and the mining stocks are falling is simply because the western stock bugs dont believe in or understand gold while the rest of the world does understand gold.(India, China) And they are loading up on physical. They have no interest in mining stocks.

Its not like the general stock market is in a bear market. The DOW is close to 13,000 while mining stocks are close to 2008 lows.

Sat, 05/12/2012 - 18:23 | 2420339 Acorn10012
Acorn10012's picture

I kinda thought that was TD's point...the commodity and company stock prices might not move in tandem.

Sat, 05/12/2012 - 23:31 | 2420660 Spitzer
Spitzer's picture

Gold is not a commodity. Bank stocks, house builders, home depot et al went up in tandem during the housing bubble

Sat, 05/12/2012 - 21:40 | 2420518 AUD
AUD's picture

The reason gold is rising and the mining stocks are falling is simply because the western stock bugs dont believe in or understand gold

Maybe but it's also because many 'gold miners' don't mine any gold. What they actually do is mine shares. They are just like these NG 'plays' that wildly overstate their reserves in a rising market, then the chumps who bought in at the top get fleeced.

Also, even some gold miners who do mine significant quantities of gold are so hocked that the only people making money off of the deal are the senior creditors. The company cannot pay a dividend so shareholders get nothing. A good example of this is Norton Goldfields, listed on the ASX.

Just another ponzi scheme.

Sat, 05/12/2012 - 23:36 | 2420669 Spitzer
Spitzer's picture

There is allot of shitty gold companies that would survive if there was one iota of interest in the sector from the general public.There is quality gold miners out there with ZERO debt and good assets. Goldcorp has no debt.

Look at all the companies that don't make any money who's stock price goes up and away. Linked-in for example. You make it sound like there is a ponzi problem in the gold sector but there is not enough money in the sector to support such bullshit.

Sun, 05/13/2012 - 01:13 | 2420741 AUD
AUD's picture

Dude, there IS a ponzi problem in the gold sector, I just described it. And at present, these ponzi schemes ARE being called bullshit on. That's why there is not "one iota" of interest in the gold sector, few of these companies can pay any dividend, they have nothing but empty promises. Many are having a tough time hanging on. Several 'gold miners' I bought shares in at more or less the bottom in 2008 are trading lower than 2008 & are 'restructuring' & so on, basically screwing existing shareholders. Some I bought shares in in 2008 have done ok, these seem to be the ones with better prospects.

My point is that the low share prices of these supposed gold miners is not just because westerners don't understand gold.

And I never said there aren't quality gold miners, nor that Linked-in is not a bullshit ponzi scheme.

Sun, 05/13/2012 - 01:59 | 2420753 Spitzer
Spitzer's picture

WTF are you talking about ?

What you are saying is that institutional investors and the general public are making wise and calculated analysis  of these gold miners and that is why the sector is starved of capital. That is total bullshit. They clearly don't believe in gold. All of the mining anylists for institutional investors currently price gold at $1200 when they are researching a company. That is proof that they don't believe in the gold bull market.

All you have to do is see what the institutional investors and the general public are buying into to realize that they are just delusional. Netflicks, Linked-in, Disgracebook, Groupon, the list goes on and on. If they are thinking rationally then why the hell are these same investors piling intp all this crap that has never made any money ?

They don't believe in or understand gold. That is the reason why the sector is starved of capital. As if they all of a sudden grow a brain and make wise analysis of gold miners. A shitty gold company has allot better chance of making money then a shitty pie in the sky social media company that has no assets, no cashflow or no nothing.

How many tech or social media companies pay a dividend ?

A gold exporer that has an asset they are working on, that doesn't have cashflow, does not make it a ponzi scheme. Yet this same company could go broke because the sentiment in the industry is so bad that no money comes in to capitalize it.

Sat, 05/12/2012 - 18:39 | 2420358 lizzy36
lizzy36's picture

NO.

Production y/y in natural gas is higher for every month in 2012 vs.2011 and 2011 was higher vs 2010.

There HAS BEEN no slow down in nat gas production in the USA. All these companies are chasing liquids and by product is dry gas. Also when one has already expanded the capital to drill a well, shutting it in is usually only done when storage is full. 

Current storage versus the 5 year average is 61% higher in the US and 70% higher in Canada. Switching (coal to nat gas) is helping but not enough.

In three months absent a hurricane price will bottom (end of August/September) and i expect go lower than the $1.90MCF we saw 3 weeks ago.

Also as soon as natual gas hits between $3 and $4 every producer will start flooding the market with product.

Reserve valutions are generally done on a yearly basis (usually late spring early summer). Writedowns are very material and affect a companies access to thing like credit lines. There can also be convenants in current debt instruments that are affected by material reserve writedowns.

US producers still have accessto  HY markets (thank ZIRP for that) but expensive capital is a short term solution and should include a prayer for higher commodity prices.

There are producers that will go bankrupt in this enviroment, and it will color the whole sector.

 

Sat, 05/12/2012 - 19:00 | 2420372 Flakmeister
Flakmeister's picture

You are aware that the annual decline rate of current NG production without any new drilling is the equivalent to the production for the state of Texas?

Only exponential growth in the number of wells has led to relatively modest increases in production. And the US is still a net importer!

I predict ~$7 NG within 30 months.....

Sat, 05/12/2012 - 19:07 | 2420379 wrs1
wrs1's picture

More like 18 months.  Go look at the charts of NG and see how fast NG bounced off these same prices.  On a nominal dollar basis, this price is far lower than when it was at $2 in 2002.  To me, that says it will probably bounce faster and higher than most expect because of just how far the pendulum swung. 

Sat, 05/12/2012 - 19:19 | 2420388 Flakmeister
Flakmeister's picture

You may very well be right.... I think you are giving a lower limit and mine is more of an upper...

Sat, 05/12/2012 - 19:24 | 2420396 Omen IV
Omen IV's picture

there was no "winter" in the east and midwest US this year - no comsumption - if it happens again next year then what?

Sat, 05/12/2012 - 19:04 | 2420375 wrs1
wrs1's picture

There HAS BEEN no slow down in nat gas production in the USA. All these companies are chasing liquids and by product is dry gas. Also when one has already expanded the capital to drill a well, shutting it in is usually only done when storage is full. 

Current storage versus the 5 year average is 61% higher in the US and 70% higher in Canada. Switching (coal to nat gas) is helping but not enough.

Actually, the EIA numbers say different.  As of 5/4/2012 current storage was only 44.5% higher than the five year average.  That storage is getting eaten up fast.  In fact, there has been no rise at all in NG storage from the producing region in the last six weeks.  That is unprecedented.  I assure you, gas is being shut in here in Texas, I know that for a fact.

Sat, 05/12/2012 - 19:19 | 2420387 Caviar Emptor
Caviar Emptor's picture

Actually, one huge problem the producers have is that they can't reduce production even when prices drop because of the clauses on their leases which mandate production. 

Sat, 05/12/2012 - 19:23 | 2420392 wrs1
wrs1's picture

Gee, you ever signed or negotiated a OGML with a producer?  Here in Texas they have this standard POS called the producer88 lease and it provides them an out with the shut-in royalty which they will never remove.  You can get them to make it higher but they won't take it out. Negotiating OGML leases that don't take you the minerals owner to the cleaners is tough work and slow to boot.

Sat, 05/12/2012 - 19:29 | 2420400 Caviar Emptor
Caviar Emptor's picture

@wrs1 No, can't say I have your granular knowledge. But here is another take: 

Supply does not drop very quickly, even if prices fall, because producers need to continue to extract natural gas in order to repay loans and to comply with use-it-or-lose-it lease terms.

http://oilprice.com/Energy/Natural-Gas/How-to-Save-the-US-Natural-Gas-Se...

Sat, 05/12/2012 - 20:04 | 2420422 wrs1
wrs1's picture

This is a myth that you are being fed by Wall Street.  Most producers already got trapped by bankers the last time around and they have protected their operations against this kind of price decline.  The only thing that chews up profits is failed exploration.  So what happens when producers quit drilling for new gas is that they quickly become cash flow positive and they can afford to shut some production in.  In fact, the stuff that is costing more to produce than it gets in the market is shut off very rapidly and the lease holders are paid shut in royalties.  At one time there were Take or Pay clauses but those were negotiated between producer and consumer, not producer and lessor afaik.  Lessors are generally in the weaker position vis-a-vis producers since they don't have the capital or expertise needed to exploit their minerals and that includes state lands here in Texas.

I am just giving you the view from someone who owns some land and gets paid royalties from actively producing wells, some drilled just in the last two years and others drilled decades ago, i.e. 80s and 50s.  We have been selling leases for years, lot's of times it's free money but once it goes HBP, they do what it takes to keep it HBP and shut in royalties are part of that cost.

Sat, 05/12/2012 - 17:33 | 2420292 RoadKill
RoadKill's picture

Sorry Tylor. I completely disagree with you. Nat Gas has bottomed and this is one of the best times to buy. Im not saying gas is going back to $8 anytime soon, but we have already gone from $1.90 to $2.50 and I see high 3s to low 4s as easily achievable in 18 months. UPL has gone from $100 to $20. This is not the time to push the short. Buy low sell high.

Sat, 05/12/2012 - 17:54 | 2420311 Acorn10012
Acorn10012's picture

Watching nat gas for awhile...would like to see a higher low before I tip-toe in. Looking for supply/inventory to dry up a bit to help the situation. The dynamic TD mentions above might be one catalyst to reduce supply.

Sat, 05/12/2012 - 18:01 | 2420314 scatterbrains
scatterbrains's picture

When the resource wars finally break out (physical war not paper) NG is going to sky..  specially if the USSA starts losing.

Sat, 05/12/2012 - 17:36 | 2420295 ISEEIT
ISEEIT's picture

The new supply discovered in Wyoming/Colorado/Utah should really help eh? I'll go find the link to save you time: Peak oil my ass though.

What good will it do? Now that is a reasonable avenue for debate. Supply however is not a legitimate issue. Government can kill demand, and the fantasy/algore/leftist antihuman fetishist will try. The question is however...will they succeed?

http://cnsnews.com/news/article/gao-recoverable-oil-colorado-utah-wyomin...

Sat, 05/12/2012 - 18:33 | 2420351 yabyum
yabyum's picture

You going to get oil out of a rock? Good luck with that! Where you going to get the water?

Sat, 05/12/2012 - 18:57 | 2420371 Flakmeister
Flakmeister's picture

You do understand what Kerogen is?

And you do know that Chevron just walked away from leases?

And Exxon gave up on some scheme a number of years ago...

The stuff that is being peddled and apparently has fooled you has been known about for years....

Best line I've heard is

"....[it] has the energy density of a baked potato....if someone told you that there was 500 million tons of Tater-tots 2000 ft down, would you start digging?  Breakfast cereral is a better source of energy...." 

Sat, 05/12/2012 - 17:52 | 2420307 Chartist
Chartist's picture

CHK needs to worry as they are all about shale gas......They're levered FCF is a huge drag.....The cure is building an east coast LNG terminal.....CHK is still a gonner, imo.

Sat, 05/12/2012 - 18:07 | 2420325 Flakmeister
Flakmeister's picture

Agreed CHK is in big trouble and so are a lot of NG players....

Please explain how an East Coast LNG facility changes anything???

Sat, 05/12/2012 - 17:54 | 2420309 q99x2
q99x2's picture

Encana Ultra short ETF - a subsidiary of Encana. Making money the productive way is so old school.

Sat, 05/12/2012 - 19:24 | 2420394 DosZap
DosZap's picture

The prices for Nat Gas are soon going to go thru the roof.

Get it now, and cheap.Shell is buliding a conversrion plant costing billions to convert it to Deisel.

Just as the Nazi's did from coal, in WWII

Not reasonble at these prices ...yet.

But NG conversion  at $6 per gal Diesel will make converting to Diesel feasible, and the prices will skyrocket for NG.

Peak Oil??.......my ass.

Think of how much this will save the Airlines............Billions in fuel costs, and there is ZERO shortage of NG reserves in just the US.

We have more than ALL of the ME combined.

NG is the energy engine  for America's future.

Sun, 05/13/2012 - 04:03 | 2420786 StychoKiller
StychoKiller's picture

Airplanes use kerosene (JP7), not diesel.

Sun, 05/13/2012 - 17:36 | 2422100 DosZap
DosZap's picture

Airplanes use kerosene (JP7), not diesel.

Yep, but do you not think with proper additives, and some changes to the jets, it will /could not be done?.

Sat, 05/12/2012 - 17:55 | 2420310 yabadabadoo
yabadabadoo's picture

I found this article very interesting.  Seems bullish for Nat gas, but bad for producers.  Appreciate any thoughts.

http://seekingalpha.com/article/569451-controversy-on-shale-gas-boom-and-burst-explained?source=feed

Sat, 05/12/2012 - 18:00 | 2420315 wesa
wesa's picture

Drilling for natural gas has just about stopped in the NW Louisiana area (Haynesville Shale play).  The people I talk to say they are moving people to other areas to drill for oil.  At some point gas production will dwindle enough to tighten the market and drive prices higher, but this may take some time.  Most of the O&G people think we are in a bottoming phase and that prices will gradually recover as supply/demand gets back in balance.  All these shale plays have added a lot of gas supply but the wells are very expensive to drill because they are deep (11,000-ft or so here in the Haynesville zone) and they involve horizontal drilling at that depth.  The wells are prolific producers for a year or so, then dwindle down to a much lower level of production that can last a long time.  At some point the wells need to be re-fracked to stimulate production.  The bottom line is that prices need to recover quite a bit to make a large-scale drilling and production program feasible. 

 

Sat, 05/12/2012 - 18:03 | 2420319 ISEEIT
ISEEIT's picture

Who gives a rat's ass if CHK is a gonner? American motors is long dead...but the automobile lives on. I actually like Aubry. He seems to be a decent enough 1%'er to me.

Best of luck to him in his next pursuit.

Keep in mind that absent these rogues, the 99% would likely starve ( or at least be starved of such a generous 'Federal family').

Choose your enemies wisely.

Sat, 05/12/2012 - 18:39 | 2420346 yabyum
yabyum's picture

90% of all daily commuters should be nat-gas, hybrid or electric! Fuck the Koch suckers, T boone was right on the nut.

Sat, 05/12/2012 - 18:32 | 2420352 Convolved Man
Convolved Man's picture

I say we crucify a few coal company executives and see how fast everyone starts leaning towards NatGas.

 

Paid political position by the E.P.A to elect a president.

Sat, 05/12/2012 - 18:43 | 2420361 yabyum
yabyum's picture

You can start with Murray from Arch coal. You know the one who sat up there and gave a fine intro to Mitt. Asshole killed a bunch of miners in Utah, got fined 500k. pennies to this prick.

Sat, 05/12/2012 - 18:43 | 2420362 HungrySeagull
HungrySeagull's picture

It's summer time. No one wants heat.

Wait until winter. Then we revisit this topic.

Sat, 05/12/2012 - 18:56 | 2420369 wrs1
wrs1's picture

Gets damn hot here in Texas and we use a lot of NG to produce electricity to keep cool.  We will be burning up that NG that gets produced in this sector and not adding to storage, that is a promise, even if the summer is cooler than usual.

Sat, 05/12/2012 - 19:24 | 2420364 wrs1
wrs1's picture

Someone hasn't been paying much attention to what is really happening in the NG business.  You read articles and you don't get the real picture.  NG has been getting shut in since last fall.  The dry gas plays are now paying shut in royalties while no new dry gas is being drilled for.  The wet gas plays are being drilled but not completed.  As long as the well has produced, the lease is considered HBP and only the shut in royalty must be paid.  The shutins are beginning to bite.  The NG storage in the producing region has been static for the last 6 weeks, that is unprecedented and if you don't believe me, you can download the numbers yourself.

 

Short NG or diss it at at your own risk, the producers in Texas are tired of the Wall Street games and are shutting their production of everything but wet gas and oil off.  It's a fact.  It is also a fact that 67% of NG production is dry gas and that the gas in those storage facilities only amounts to 30-40 days of consumption.  It's also a fact that the US consumes more NG that it produces for 6 months of the year and we are about to enter the next three where that is the case.  With the shut ins, it may turn out that the US runs out of gas in storage by the end of this year.  The spike in NG prices is going to make your eyes bulge out.

Don't laugh, this is what happened before.

Sat, 05/12/2012 - 19:37 | 2420404 RoadKill
RoadKill's picture

The biggest problem with most "energy" analysts is they have never lived through a full cycle. Eiather they got started in a bull cycle and think everything is a buy after a 20% dip. Or they got started in a bear and nothing is ever worth owning. Personally Ive been doing this since 97. So I remember when gas at $2 and oil at $20 was actually a pretty good market. Gas at $3 and oil at $30 was HEAVEN. IMO (which is of questionable value) this is one of those cycle bottoms. This is coming from someone that saw all this shale gas coming back in 2006 and predicted that $8-$10 gas was too high. Someone that currently thinks oil is going to $50 longterm (because the whole world has shale). Point is Im not a perma bull. But when.you have a chance to buy UPL at $20 thats a once in a decade opportunity you are getting. This from someone that met with mgmt 6+ times a year for 6 years and never bought the stock for my fund because it wasnt cheap enough at $50 or $100.

Sat, 05/12/2012 - 19:45 | 2420412 RoadKill
RoadKill's picture

To finish....

People who are negative here need to go back and look at what happened post Katrina and in 2008/2009.

This is not the first time that gas prices have fallen 75%+ and its not the first time we have shut in production. We will bounce off this bottom. These prices are too low to sustain dry gas production. And contrary to what some are posting ASSOCIATED gas is only 1/3rd of production. While $4 is probably high enouhh to sustain dry production, history suggests we will shoot past that to $6. And then another warm winter or cool summer will cause a crash back to $2. Rinse and repeat.

Sat, 05/12/2012 - 19:52 | 2420414 RoadKill
RoadKill's picture

And to wrap it up. Go study the methane / ethane / propane splits.

Propane is getting priced off oil. Methane is priced at a historically cheap 1/45th of oil (normally 1/6-1/8). Ethane is in between. The difference is SOLEY export capacity. The US exports millions of gallons of propane to South America in smallish individual use canisters.

All we have to do is find a similar easy way to export methane and ethane or convert some regas facilities to liquefaction. Go look at Met coal. Even a small amount of export capacity tightens the market to international prices very quickly.

Sat, 05/12/2012 - 23:28 | 2420651 CharlieSDT
CharlieSDT's picture

Thanks for all the good info.  I'd like to invest now, but in royalties, not in energy stocks.  Where can I find royalty interests for sale?

Sun, 05/13/2012 - 14:36 | 2421598 HungrySeagull
HungrySeagull's picture

Now Katrina was special.

If memory serves 4 of 5 pipes to our area was down a week after.

I suppose once the old coal plants are shut down, they are gonna want new natgas places. I am king coal... always have been. These moves in the heart of hard coal country is a negative for the USA and will generate higher Natgas prices.

Sat, 05/12/2012 - 18:51 | 2420366 Charlie
Charlie's picture

I wonder which producers will survive.

Sat, 05/12/2012 - 18:55 | 2420368 wrs1
wrs1's picture

Those with good oil production.  A NG producer is mostly a cash flow positive operation if the price of NG is above the cost of delivery.  It is exploration that produces negative returns.  So companies with Eagle Ford plays and actual oil production say in the Permian Basin will do fine.  This is why CHK is planning to sell their Permian Basin assets because that is their best stuff behind the Eagle Ford assets.

Sat, 05/12/2012 - 19:02 | 2420374 Flakmeister
Flakmeister's picture

Actaully, it is NGLs and some condensate more so than oil...

The liquids are paying the freight, if a "wet" NG well gets enough NGL such that the effective price recieved is ~$7 per mCF, the company is ok....

Sat, 05/12/2012 - 19:13 | 2420381 wrs1
wrs1's picture

They need more than simply NGLs.  There is a limited market (it may be bigger than production for now) for NGLs and condensate isn't as desirable as it used to be.  The liquids are paying the freight on wells with liquids but a NG company needs oil as well, most of them are diversified but the ones that aren't will be hurt the most.  The NGL wells are very expensive to drill and the liquids have to be extracted by separation which means a different transmission network.  That is one of the bigger problems right now with these NGL fields, they are costing a lot of money to simply produce because of the infrastructure expense.

Sat, 05/12/2012 - 19:15 | 2420382 wesa
wesa's picture

wrs1 is correct.  Shale gas is typically dry gas (does not contain recoverable and usable fluids).  It is being shut in at the current prices.  Oil and wet gas is still alive.  At $90+/bbl almost any oil well will make money.  Gas prices will go back up as supply dwindles.  We won't always have warm winters.

Sat, 05/12/2012 - 19:35 | 2420403 wrs1
wrs1's picture

At $90+/bbl almost any oil well will make money.

Only if it's already in an area with well service facilities.  If there is no well service in place, then it requires a lot of production.  10bpd wells which are cheap to drill and will produce for a long time aren't profitable if you have to build a pipline network out to them.  I have oil under a section in West Texas in the Delaware Basin and it's not getting produced because on average the wells would be 10-20bpd and there is no well service around.  I have two other sections to the east about 10 miles that are producing at that rate from wells drilled back in the 50s and since they are hooked up already, they continue to be produced.  I wish they wouldn't produce those any longer because the value of what is in the Wolfcamp and Avalon is much higher than the Delaware but under the old leases, the Delaware keeps the whole lease HBP.  They didn't have Pugh clauses back in the 50s so I am stuck with what my grandparents did.

 

Sun, 05/13/2012 - 14:39 | 2421615 HungrySeagull
HungrySeagull's picture

We have three somewhere in Texas that are capped due to salt. I think if they ever uncap them (Not likely, a new road is planned that will essentially cover them.)

Where we are there are around a thousand rigs doing gas. Not too much for oil. They just completed laying a 10 foot diameter gas line some distance away.

Fracking is where they throw money into the hole to pump up a few dimes left over.

Sat, 05/12/2012 - 19:56 | 2420417 JoeStocks
JoeStocks's picture

I think the natgas inventory reports are leaning bullish. Last year for the last 4 weeks we had an inventory build of 348bcf. This year, 128bcf. We are gradually chewing through the excess surplus. I expect to see higher usage this summer as well.

Sat, 05/12/2012 - 20:07 | 2420423 Yen Cross
Yen Cross's picture

Nat Gas, looks like a good hedge to me!   

  My QUANTUM/ energy statistics never lie.

 

    Seriously. I have a " LNG " fleet of tankers, in route to the " Summer Olympics".

Sat, 05/12/2012 - 21:32 | 2420513 Atomizer
Atomizer's picture

Lets just pray that the Queen ordered enough LNG to furnish all guests with Toad-in-the-Hole and a side order of Yorkshire Pudding.

Sun, 05/13/2012 - 14:39 | 2421620 HungrySeagull
HungrySeagull's picture

No need to worry, split pea soup and a batch of ravens.

Sat, 05/12/2012 - 20:19 | 2420436 Centurion9.41
Centurion9.41's picture

Naked to the strip aside, to play NG on the short side is simply the wrong side right now.  If she or her suitors break to new lows, then it makes sense.

The "infrastructure" argument against NG is BS.  There's a huge difference between bear infrastructure argument between NG and things like electric cars.  Hundreds of millions of homes already have either NG pipes directly to the house, or are zoned for NG tanks.  Conversion of an auto and addition of a home "NG pump", if incentiveized by tax structure, will dramatically effect the potential.  An auto can have a conversion kit put on that allows switching between NG & gasoline by a push of a button, and without having to stop.  Electric cars are no where near as green/clean; green coal plants are not that clean and the infrastructure requirements to build up amperage capabilities would be enormous.

Bottom line.  After the "naked to the strip" is accounted for, which is simply a mark-to-market effect that has been a known quantity to the market for some time, one can have a very nice speculative relationship on the long side with NG and her suitors, for well over a decade.  And any "naked to the stip" cleansing of the sector will be a good thing, for speculators, investors, and future energy economics.

Otherwise, great piece that opens some ignorant eyes.

 

Sun, 05/13/2012 - 12:56 | 2421381 sun tzu
sun tzu's picture

You cannot fill up your car on the NG that is piped into your house. You need a compressor.

Sat, 05/12/2012 - 20:48 | 2420462 Atomizer
Atomizer's picture

 

 

I just came back from the garage. Had to lecture my SUV. The other one, I had to send a 1,284 mile text. Told them both, Jim Cramer has been talking about the NAT gas boom since 2007 and your days are numbered. I tell ya… any day now!!! 

Cramer Says Stick with Natural Gas 2007 

Cramer’s take on Natural Gas – March 16,2012 

Ding.. Oh just got an email back from my SUV in Marco Island. Let me grab my glasses first.. Ok it says, tell Jim Cramer that he’s making quite a living off selling T Boone Pickens dreams. Also, tell Mr. Cramer to use Mr. Pickens’ windmill to divert the stench that purges from his mouth. PS: when are you coming back down, I’m really bored sitting in this garage.

 

/sarc

 

Sat, 05/12/2012 - 21:43 | 2420525 CryingBear
CryingBear's picture

I HOPE GOLD MINERS HEDGED FOR THE NEXT 5-YEARS OR THEY WILL ALL GO BROKE

Sun, 05/13/2012 - 07:44 | 2420869 poopman
poopman's picture

gold is a bubble my friend. wait and watch, its popping.

Sun, 05/13/2012 - 17:42 | 2422122 DosZap
DosZap's picture

gold is a bubble my friend. wait and watch, its popping.

You on crack again friend?......................Show me how Gold could possibly be in a bubble.

When practically NO public buying is going on, and a handfull of institutions are buying it for insurance.

The BRICS, are snagging every ounce they can, and the CB's, but NOT the general public.

IF/When Gold goes down farther, it will be because of the EU situation,and /or the market will crash.

BUT,then it will that will awaken the Kragen, and then you will finally see your bubble,maybe in 3-5yrs??.

You old enough to have seen the last bubble?.................what a show.

Sat, 05/12/2012 - 21:44 | 2420529 Yen Cross
Yen Cross's picture

Atomizer, you tell it like it is! Pepe' le' Pew'  style!  I love ya!

Sat, 05/12/2012 - 21:49 | 2420531 CryingBear
CryingBear's picture

HEY, HERE IS AN IDEA TO STOP SPECULATION IN NG. SET A PRICE. THIS WAY, THERE IS NO PRICE VOLITILITY AND ONLY COMPETENT PRODUCERS WILL BE ABLE TO MAKE PROFITS.

Sun, 05/13/2012 - 14:52 | 2421648 jonjon831983
jonjon831983's picture

Price fixing, isn't that a way to get a black market going?

Why would you invest in NG exploration if your potential gains are fixed?

I guess you could give bonuses for exploration, development, and production.  Then again, who is setting this bonus and determining for how much of what is done?

Sat, 05/12/2012 - 22:48 | 2420605 Yen Cross
Yen Cross's picture

 Lets discuss 'NAT gas"!  It is a bottom cycle trade! 

  It's EXPLOSIVE, and Expensive, to transport. The infrastructure is enormous!

   Thermal/ discharge is 2/3 of crude oil. I'll  just keep quiet.

Sat, 05/12/2012 - 22:54 | 2420612 Bicycle Repairman
Bicycle Repairman's picture

Yen Cross, you heat with NG?  I do and therefore I have an NG "fill pipe" right at my house.  Am I worried about explosions?  Nope.  Thermal discharge is 2/3 of crude oil?  So what?  Cars run on NG.  EOS.

Sat, 05/12/2012 - 22:52 | 2420610 Bicycle Repairman
Bicycle Repairman's picture

And now the GAO says: "Recoverable Oil in Colorado, Utah, Wyoming 'About Equal to Entire World’s Proven Oil Reserves"

http://cnsnews.com/news/article/gao-recoverable-oil-colorado-utah-wyomin...

WTF, eh Flakmeister?

Sun, 05/13/2012 - 09:32 | 2420946 Flakmeister
Flakmeister's picture

Read the fine print... its kerogen.... not oil, hell, the fake fire place logs have higher energy density...

Read up on the history of the majors trying to develop it...

Sun, 05/13/2012 - 19:57 | 2422356 Bicycle Repairman
Bicycle Repairman's picture

So what is this then?  A make work project?

Mon, 05/14/2012 - 09:01 | 2423219 Flakmeister
Flakmeister's picture

Its a chimerical boondoogle...

Calling this oil is like saying that the Dead Sea is a source of fresh water....

Not much has changed since this came out

http://hubbert.mines.edu/news/Youngquist_98-4.pdf

Tue, 05/15/2012 - 21:32 | 2429866 Bicycle Repairman
Bicycle Repairman's picture

So it seems.  Why the story?

Sun, 05/13/2012 - 02:11 | 2420768 StockProdigy
StockProdigy's picture

Nat gas currently trades @ 2.50. Either the writer has done zero research (since he thinks nat gas will not trade beyond 2.00) or the article is dated. I have traded XCO and KWK almost every single day with a profit 80% of the time. My only hope is the volatility in nat gas continues.

Sun, 05/13/2012 - 08:11 | 2420885 overmedicatedun...
overmedicatedundersexed's picture

nat gas should be on everyones radar..how controlled the supply is and by whom? too many producers and E&P co's have massive debt, but hey that does not bother our governments..any good ideas on low debt low cost producers with good hedge positions would be welcome..UPL? not so sure..

Sun, 05/13/2012 - 09:33 | 2420944 Mitch Comestein
Mitch Comestein's picture

So, after 50%+ drops in the nat. gas stocks he is now saying there will be a bloodbath.  As if the market cannot figure out that reserves will be written down (GAAP gimmics aside). 

This article seems a little miopic in its reasoning.  The bigger question is which HIGHLY leveraged companies are going to go BK in this sector.  Chesepeake is my favorite to go poof!  It has a current ratio of 0.5.  Fuck write-downs.  That just hurts retained earnings.  Cash flow is the issue. 

So, if one of you wants extra-credit, one could figure out which nat. companies have bonds coming due, and add shorts accordingly.  Tyler, sound like something your people could put a list together.  I don't have the resources.

Sun, 05/13/2012 - 09:58 | 2420977 trulyslide
trulyslide's picture

I sort of just skimmed this, but it seemed like the primary premise of this article was based on Natural Gas continuing to trade below $2 BTU. It has rebounded out of those depths and is back up to $2.50 with all indications it's heading to $3.

Mon, 05/14/2012 - 08:08 | 2423125 JoeStocks
JoeStocks's picture

Chesapeake Energy Corp. (CHK) expects activist investor Carl Icahn to disclose soon that he has taken a significant stake in the troubled natural gas company, sources say, reports the Wall Street Journal. Reference Link :theflyonthewall.com

Mon, 05/14/2012 - 09:56 | 2423445 overmedicatedun...
overmedicatedundersexed's picture

chk wants to sell assets to lower debt by 25%..chk was run well for the lenders not so much for shareholders.

thats why the CEO took all his positions in the wells and took  max equity loans..thats his style debt up to his eyeballs..Icahn sees breakup of co as good ROI at this price level ..ave stock investor should stay clear.

investing in oil and nat gas with  hostile gov regulators has killed this sector along with CEO's like CHK's.

I have looked to find one well run E&P/producer with nominal debt and found none in America.

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