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Gasco Energy Management Discusses Q2 2012 Results - Earnings Call Transcript

Stocks in this article: GSX

Gas markets are changing rapidly. In mid-April, the NYMEX prompt month natural gas contract traded at $1.90 per MMBtu. That marked the lowest price in more than a decade.

Since that 10-year low, prices have recovered more than 60% to around $3.20. Our wellhead prices received and followed a similar path.

To remind the listener, we have an internal projection of $3.50 wellhead price for our Uinta gas drilling project, which would generate a 10% rate of recurrent for drilling. This $3.50 price is prior to the beneficial effects of the drilling carry we received from our Uinta Basin JV partner, which would reduce the needed wellhead price well below recent levels.

Of course, we do not intend to drill 10% rate of return projects, but the encouraging indications of a gas price revival are positive for Gasco and its shareholders.

The recent low prices may be traced to 3 causes. First, the engineering success of hydraulic fracturing in reducing the cost and increasing the productivity of liquids-rich plays like the Eagle Ford Shale in Texas and Marcellus Shale in Pennsylvania. Second, the destruction of industrial demand that followed the recession of 2009. Third, the unseasonably mild winter this year that reduced demand for space heating in both home and commercial industrial markets.

The seeds of a long-term recovery in natural gas prices are being sung this year. These effect -- these seeds affect both the supply and demand side of the equation. On the supply side, the number of rigs looking for natural gas has been on a steady decline over the last year.

As of July 27, the North American natural gas rig count was 505 rigs, down from 877 a year ago. This is a 42% decrease in 1 year. Many industry analysts believe that the current rig count is below the number of which the fleet is able to maintain supplies at current levels. Consequently, we may begin to see a tightening in supply in the coming months.

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