They are bullish on natural gas in Mexico.
The sentiment is strongly favorable toward the outlook for the price of natural gas (except if you're a user.) It feels as though most are only coming to this table now, and begrudgingly so at that. The best summary of the optimistic outlook came from Ron Barone, UBS's longtime natural gas guru.
Barone feels that global warming issues and coming clean air legislation will hamper the increased use of coal, with natural gas the spill-over beneficiary.
Ethanol is everyone's favorite green energy, and while I have doubts about the wisdom of that position, it takes a lot of gas to produce ethanol.
Canadian natural gas deliverability is down and not likely to soon recover. There are several reasons why this has happened but the principal causes are a sharp increase in the cost of debt for "junior" gas producers, and an equally sharp increase in overall costs in the Canadian gas fields. The "juniors" were able to finance rapid drilling expansion the last few years due to the very low cost of debt.
With the tightening of credit initially due to the sub-prime mess, the cost of debt has risen dramatically. It should never have been so cheap for these companies, but money was being thrown at all sorts of enterprises at absurdly low interest rates, and there has been a sharp cutback in drilling plans due to the cost of credit. Overall costs have soared with the strength of the Canadian dollar, which has soared vs. the U.S. dollar to over $1.00 from 62 cents. With their costs denominated in the local currency, their dollar strength has forced reduced drilling.
Liquefied Natural Gas (LNG) is hoped to be a lifeline because it's transportable over great distances as opposed to pipelines' physical restrictions, but LNG is enormously expensive and in worldwide demand, so it won't flow to the U.S. unless the price is attractive (read: higher.)
The spurt in domestic production has been spurred by the prolific Barnett Shale field around Fort Worth. It is expected to reach peak production in 2011, and then start its decline. There has been no discovery to replace it.
Electricity generation is the biggest demand component of gas, and even with a slowing economy, the U.S. is woefully behind the necessary construction of new power plants to meet expected demand. The excess capacity needed under normal circumstances is 125% of normal usage. We are at 117%, on our way to 112% by 2012 without new plant construction. It costs somewhere between $3000-$5000 per kilowatt hour to build a nuclear plant. There seems to be a lot of disagreement about the cost, but it assumes you can get permitted. Coal costs over $2000 per KW, and natural gas less than $900. The inescapable conclusion is gas will go higher in price.
I have talked before about the BTU equivalent stuff and David Ginther of Waddell and Reed agrees. He was early in his prediction regarding the surge in oil prices. He is guessing that gas will be north of $12 per mcf beyond 2010, vs. $9.50 or so now. I figure that the stocks are discounting about $7.50 gas and maybe $60-65 oil (against the close to $100 it's going for now.) I mentioned the other day that there are only 51 "days of usage" in worldwide storage. I should have mentioned that the five year average is 55 days. I'm late again for cocktails, more later.
Vincent Farrell Jr. is a principal of Scotsman Capital Management. Prior to joining Scotsman in April 2005, Farrell was chairman of Victory Capital Management of Cleveland and chairman of Victory SBSF Capital Management in New York. He was a founding partner of Spears Benzak Salomon & Farrell, which was acquired by KeyCorp in 1995. Vince held a variety of positions in his 23 years at SBSF, including chief investment officer, and he served as the portfolio manager on a number of the firm's largest client relationships. He is a regular guest on CNBC as well as other national print and broadcast media.
Prior to joining SBSF, Vince spent nine years at Smith Barney as a vice president, sales.
Vince graduated from Princeton University in 1969 and received his MBA from the Iona College Graduate School of Business in 1972.
