NEW YORK (The Deal) -- Oil prices, which have become increasingly volatile with the Iran nuclear talks, are producing most of the headlines these days. But prices for natural gas, which fuels everything from furnaces to power plants to cars, are falling as well, trading recently below $3 per thousand cubic feet equivalent, compared with almost $4.50 this past fall and a high of around $14 almost seven years ago. Oil and gas companies have been staggered by the combination of blows.
"The greatest challenge for the petroleum industry is figuring out how to get natural gas prices back to levels that would support more profitable E&P operations," G. Allen Brooks, managing director at Houston investment bank Parks Paton Hoepfl Brown, wrote last week in his popular newsletter, Musings from the Oil Patch.
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The tide may be turning, however, as industry watchers see prospects for the clean-burning fuel starting to improve in the second half of the year. According to Global Hunter Securities, natural gas that's produced from oil wells -- which is known as "associated gas" -- accounts for 16 billion cubic feet per day, or about 23% of overall supply. But with the big decline in the oil rig count (48% over the past four months) after drastic cuts in capital spending made by strained companies, there will be a lot less of that associated gas being produced, leading U.S. natural-gas producers to become more bullish on pricing for the second half of this year and beyond.
In addition, infrastructure-related production caps in the Northeast -- Chesapeake Energy (CHK - Get Report) is curtailing as much as 250 million cubic feet per day gross this year -- coupled with big rig count drops in gassy places such as the Marcellus (down 15%) and the Utica (down 38%) shales are expected to support prices, Global Hunter said.
Those trends could benefit U.S. natural-gas producers in general, particularly the Northeast players. The prime beneficiaries would include Chesapeake, Antero Resources (AR - Get Report), Cabot Oil & Gas (COG - Get Report), Eclipse Resources (ECR), EQT Corp. (EQT - Get Report), Gulfport Energy (GPOR - Get Report), Noble Energy (NBL - Get Report), Rexx Energy (REXX), Rice Energy (RICE), Range Resources (RRC - Get Report) and Southwestern Energy (SWN - Get Report).
A surge in prices would make investors such as Carl Icahn happy, as he owns 11% of Chesapeake. Icahn boosted his shares by 6.6 million to more than 13 million in early March. Archie Dunham, Chesapeake's chairman and former CEO of ConocoPhillips (COP - Get Report), also purchased 1 million shares last month, giving him 2.6 million shares, which is a double vote of confidence for a company that was dubbed one of worst performing stocks in the Standard & Poor's 500 Index this year and has been one of the most heavily shorted Big Board stocks, as well.
It wasn't so long ago that oil and gas companies were dumping their natural-gas properties for oil ones, with oil prices averaging above $100 per barrel and natural-gas prices still in the dumps. But conditions for natural gas began looking brighter last fall, when an early cold snap sent natural-gas futures prices up to almost $4.50 per thousand cubic feet equivalent. When no more cold weather appeared until after the new year, however, prices fell back down to below $3, where they have stayed for almost all of this year, Brooks wrote in his newsletter.
The U.S. Energy Information Administration is becoming more bullish. Its short-term energy outlook in March predicted that U.S. natural-gas consumption will average 75.7 billion cubic feet per day this year and 76.2 billion next year, compared with an estimated 73.5 billion in 2014. Higher consumption is coming from power plants and the industrial sector, while residential and commercial consumption are expected to decline both years.
Brooks isn't as optimistic about natural-gas prices as some are. He said storage volume predicted for the end of winter plus continued growth in natural-gas production, signals that gas below $3 is likely for the rest of the year, barring an extraordinarily hot summer. Couple that with low oil prices, and he sees more pain for the industry.
"The longer crude oil and natural-gas liquids prices remain depressed, the greater the likelihood that drilling for both oil and gas will suffer," he said.
Flip of the coin, anyone?
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