Best Informed E&P CEOs Have Blown Natural Gas Price Predictions

[Swizzled]

 

I wrote the following article.  For two years I have been trying to figure out when to start buying natural gas companies.  When I look back to what the people at the top of the industry have predicted and just how out to lunch they have been I realize that there is no way that I'm going to be able to call a turn in prices.

 

The three people and their specific predictions:

 

http://www.gurufocus.com/news.php?id=116295

[biaggio]

Swizzled, I appreciate your various contributions to this board. Have often visited your blog site. Thanks.

 

re nat gas company investments- I find the information in the monthly letters to shareholders from Peyto CEO very interesting and informative. Check them out at http://www.peyto.com/

 

The Nov letter is interesting in that he states that his company is not depending on higher nat gas prices to make money, as higher nat gas prices will lead to higher operating prices + decreased margins. In other words it may not be important to call the turn in price of nat gas...just look for the low cost producer selling at a discount to IV.

 

[Myth465]

Thanks for the post.

[twacowfca]

If the US government declared that half the natural gas reserves in the country were now off limits, what effect do you think that would have on prices going forward? 

 

Invert.

[Myth465]

I have been saying for about 8 months now that a ban due to Water contamination (and it may be needed based on all the smoke) would be a savor for conventional gas, which was not near population centers. SD has a very low person per square mile where they drill.

 

Short of that gas prices are going down, which supply spikes here and there. That is until drillers gain and maintain discipline.

[Josh4580]

This is why Ken Peak of Contango does NOT hedge out his natural gas exposure.  MCF is the lowest cost producer with no debt so they can survive the depression-like natural gas prices and benefit from spikes in the market due to black swans (banning shale gas, higher decline rates, lower shale rig counts).  This seems like a much better strategy than to play in the natural gas market which is dubbed the "widow maker". 

[Myth465]

LOL I really like that.

 

http://www.google.com/search?q=natural+gas+the+widow+maker&ie=utf-8&oe=utf-8&aq=t&rls=org.mozilla:en-US:official&client=firefox-a

 

http://www.bloomberg.com/news/2009-09-15/natural-gas-widow-maker-seduces-unwary-investors-eric-pooley.html

 

Thanks for the nick name, it makes complete sense.

[twacowfca]

If the US government declared that half the natural gas reserves in the country were now off limits, what effect do you think that would have on prices going forward?  

 

Invert.

 

My point was that the inverse of this has already happened. The new fracking techniques have doubled the actual or potential gas reserves in the USA.   :o   >:(

[biaggio]

If the US government declared that half the natural gas reserves in the country were now off limits, what effect do you think that would have on prices going forward?  

 

Invert.

 

My point was that the inverse of this has already happened. The new fracking techniques have doubled the actual or potential gas reserves in the USA.   :o   >:(

 

But what are the actual cost per MCF? I have read the argument that the cost of a lot of these unconventional NG companies is $6/MCF..If so then you would expect the supply at current  prices  to drop, no? Then again,the actual cost may decrease over time with further innovation.

[Myth465]

Which is why I think gas is simply going to remain low over the long term. There may be a black swan spike over a short period of time, but there is limitless supply waiting to come online should prices move up for any reason. Gas prices have a a natural ceiling. Why play the spike game when oil or other commodities have better long term fundamentals?

[twacowfca]

Which is why I think gas is simply going to remain low over the long term. There may be a black swan spike over a short period of time, but there is limitless supply waiting to come online should prices move up for any reason. Gas prices have a a natural ceiling. Why play the spike game when oil or other commodities have better long term fundamentals?

 

Exactly.  Well said!

[Uccmal]

My understanding is that the relative available energy in natural gas should put the price at 1/6 of oil.  That implies that the present price of gas should be around $13 / or  the price of oil should be  about $30 to get equivalency.  I am guessing that coal is cheaper than both.  

 

Economics dictates that where substitutable in NA gas should replace oil, such as home heating, transportation?, and some power gen.  However, there is a huge lag time to all this.  Cogen gas plants are being slowly built in Ontario but everyone has to trudge through NIMBY issues despite the reality that roads produce far more pollution.

 

I have followed nat. gas for a long time.  Long enough to know that prices are unlikely to ever go up more than temporarily.  Apparently, not long enough to learn not to invest in natural gas E&P cos from time to time though.   So, one really needs to determine the lowest cost producer.

 

BTW:  I am of the opinion we are more likely to see $30 oil than $13 gas for any duration.  Call me crazy.  

[Uccmal]

The other problem is the price connection with labour cost.  As prices rise companies get great cash flow but then the hangover starts to set in while the binge is ongoing.  Labour prices skyrocket, fuel prices tank, and cash flows compress and then we have two years of recaps.

 

I have read that labour costs are already getting sky high in Alberta again.  They are trying to get immigration to admit workers from elsewhere (where is probably a reasonable question).

[Myth465]

Per a recent conference I attended with an Economist who focuses on energy. Natural gas has huge issues in terms of switching costs. WE dont have the infrastructure to run our cars off of natural gas or to supply all of the power plants in the US with it.

 

I dont think the energy ratio matters much due to this. Ideally there should be a substitution but these items are not fungible. I cant just fuel my car or fly planes or any of the other material uses of energy with nat gas due to the infrastructure requirements.

 

I have more hope on Exxon lobbying to correct some of these issues, and producers pushing LNG to create a world market for gas, that may however simply lower the world wide gas price.