This should put a smile on all you natural gas fans. Even though the article doesn't say anything we don't already know sure is nice to see it in Barron's
From Barron's:
Cooking With Gas
A long-battered fuel's prospects finally are glowing
By Harlan S. Byrne
Luncheon business at Houston's swank Petroleum Club has picked up
recently, observes Mark Papa, the chairman and chief executive of EOG
Resources, a leading natural-gas producer. "It's getting harder to find a
waiter," he notes. That wasn't a problem a year ago, when the energy
economy was still reeling from the impact of a long slump in oil and gas prices
and in drilling activity, just prior to a remarkable comeback.
For sure, Papa's mood has brightened a lot of late. EOG's profits and stock
price have jumped, as his company and many others cash in on one of the
tightest supply situations in the big North American market (mostly the U.S.)
in quite a spell. Demand outside North America is high, but in most areas less
difficult to satisfy.
Industry analysts and money managers who invest in energy-related shares
employ such superlatives as "phenomenal" to describe what has happened in
the American market, including a spurt of more than 35% over the past year
in the spot price for natural gas to a recent level around $2.80 per thousand
cubic feet. The sharp rise has been driven by stronger-than-usual demand,
despite warmer winter weather and, most important, a 5% or more ongoing
lag in production to build up inventories. The advance in the price of a key
rival -- oil -- certainly hasn't hurt, either.
Suddenly, the once seemingly eternal "gas bubble" -- the oversupply that
pounded producers for years -- appears to be deflating.
In fact, the gas supply is "the tightest in about three decades," says New
York-based PaineWebber's Ronald Barone, who has tracked the gas
industry that long. Frank Reinhardt, a veteran analyst at Carl F. Pforzheimer
& Co. in New York City, concurs: "I look for gas on the futures market to
head for $4, with high prices continuing for another year or so." Reinhardt
thinks the industry will have a "tough time" meeting near-term demand in the
U.S.
Major discoveries of gas in deepwater sections of
the Gulf of Mexico and in the Arctic, he says,
might ease the situation, but not for several years.
George Gaspar, who follows oil and natural gas
for Robert W. Baird & Co. in Milwaukee, notes
that underground storage of gas in the U.S. is
running about 347 billion cubic feet under last
year's nearly 1.4 trillion level. He calculates that
about two trillion cubic feet would need to be
added in the next 29 weeks to bring inventory to
desirable levels by the onset of winter. Last year,
the U.S. consumed about 22 trillion cubic feet of the fuel.
Finding new gas deposits in the U.S. has become more difficult as formerly
major producing areas are depleted. And Canada isn't likely to sell enough to
its southern neighbor to end the supply squeeze for some time. Indeed, there
are questions about how rapidly a large new pipeline under construction from
Western Canada to the U.S. East Coast, via Chicago, will come fully on line.
It's scheduled to start operations late this year, but has encountered some
difficulties. And, Gaspar notes, Chevron recently stated that its Canadian gas
production had declined.
Demand is being boosted by the trend among electric-power companies to
use gas turbines to produce power, rather than higher-polluting plants that use
other fossil fuels. The demand situation won't be eased as the weather heats
up. Indeed, a hotter-than-usual summer could worsen matters.
Higher natural-gas prices, of course, have the makings of political problems,
just as soaring heating oil and gasoline tabs, dictated largely by OPEC
production quotas, led to calls by some consumers and politicians for the
government to take steps to hold them down.
Of course, a year ago, such potential problems would have been very
welcome in an industry accustomed to the torpor brought on by chronic
oversupply and the lack of pricing power.
The gas industry is dominated by the same major producers, such as Exxon
Mobil, BPA Amoco and Shell, that are the titans of the petroleum world.
(Indeed, to some extent, natural gas can be viewed as a byproduct of oil,
since much of it is found by drillers searching for petroleum.)
Although gas has a relatively modest effect on the earnings of the oil majors, it
has made a nice contribution to their recently soaring profits. But gas's
greatest impact is evident among the smaller, independent energy producers,
as the entire industry has undergone a major consolidation in recent years.
The blur of takeovers, mergers and friendly acquisitions has, in great part,
been spurred by the industry's tough economics, especially the need to have
considerable financial heft to pursue exploration or pipeline ventures.
One planned union is that of El Paso Energy and Coastal, two pipeline outfits
that also are both substantial producers of gas and hence have benefited in
two ways from the recent price surge and growing demand. Anadarko
Petroleum and Union Pacific Resources also are preparing to merge, creating
what probably will be the largest of the independents, with $2.5 billion in
annual revenues.
Among the leading independents is Apache Corp., profiled in Barron's last
year ("Acquire and Exploit," June 28, 1999). Back then, the company's crusty
CEO, septuagenarian Raymond Plank, boasted that Wall Street was
underestimating Apache's earnings potential, both for 1999 and 2000.
In fact, the company earned $1.72 a share last year; when we interviewed
Plank, analysts had been expecting just 70 cents. This year, the consensus
estimate, as reported by First Call/Thomson Financial, is $3.13 a share. But
Plank says "we could double" 1999's net. The stock recently has been
changing hands around 50, up from 37 at the beginning of the year.
George Gaspar of Robert Baird boosted his
price target on the shares to 62 from 54 and his
earnings estimate to $3.21 from $3. The company is sharply increasing its
drilling, in part to explore last year's $1.4 billion acquisition of properties in the
shallow areas of the Gulf of Mexico and in Canada.
Apache also is active abroad, developing oilfields in Egypt and Australia and
conducting promising exploratory drilling in Poland.
Another company -- one of the largest independents -- that some investors
favor is Burlington Resources, which had $2.1 billion in revenues last year. Of
analysts reporting recently to First Call, 28 have "strong buy" or "buy"
recommendations on its shares. The big attraction: a consensus earnings
forecast of $1.59 a share this year, roughly double last year's 77 cents.
Investors seeking an almost pure natural-gas play might want to examine
EOG Resources, spun off last year by Enron (a pipeline company whose
shares have soared as a result of its growing use of pipeline right-of-way for
fiberoptic lines to carry broadband data services).
The company is expected to net $1.11 a share this year, according to First
Call/Thomson, more than double its 1999 earnings. However, even that could
be an underestimation.
Mark Papa, EOG's CEO, says 87% of the company's production is natural
gas, and he's expecting U.S. supplies to remain tight at least through this year.
That's why he maintains that "I think we'll be comfortably ahead of the analyst
consensus. I'm sitting here, smiling ear to ear."
Although the natural-gas drilling-rig count is projected to rise to 600, Papa
thinks that would still be 50-75 rigs short of making up the production deficit.
And, he adds, other problems could hobble expanded production efforts.
A major one is a shortage of personnel. The industry's hard times over much
of the past decade led to layoffs and early retirements of geologists and other
technical experts. Replacing them quickly will be impossible. And for much
the same reason, fewer college students have been pursuing technical courses
that would prepare them for a career in the oil and gas industry.
One little-recognized beneficiary of the growing demand for
electric-generating equipment powered by natural gas is General Electric. The
giant manufacturer is the nation's dominant producer of gas-fired turbines,
both for peak power and everyday services.
Just recently, FPL Group, the parent of Florida Power & Light and an
independent power-production subsidiary, signed a multiyear $3.7 billion deal
for GE to provide gas turbines and services. A GE spokesman says the
company is projecting a record $30 billion backlog for gas turbines and
services for this year, up from $23 billion last year.
How hot is the gas turbine market? In the past two years, orders have
doubled. And demand could ramp up even more, driven by environmental
concerns that make new coal-fired and nuclear-powered plants unattractive.
In fact, some industry experts predict, U.S. natural-gas consumption should
rise 50% over the next decade, with most of that increase reflecting electric
utilities' growing use of gas turbines.
Of course, in light of the natural-gas industry's often miserable history, some
investors view the current boom with skepticism. But with many of the once
top-producing areas of the U.S. drilled out, apart from the deep waters of the
Gulf of Mexico and barren stretches of the Arctic, the likelihood of an
undiscovered cheap new source of the fuel seems remote. After years of
gloom, the outlook for natural gas finally is glowing. |
