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Gold/Mining/Energy : Big Dog's Boom Boom Room
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To: Claude Cormier who wrote (19649)3/4/2003 8:24:29 PM
From: Ed Ajootian  Read Replies (3) of 206306
 
Claude,

Not sure whether there is enough elasticity to get demand down to $3. Others know this macro stuff better than I do, but I believe something like 60% of the total natgas demand in the US is for residential heating. Not much elasticity there IMO. The rest of the demand is potentially open to being reduced I suppose.

But the other factor that we need to keep in mind is that the cost structure of the industry has gone up due to the maturing of the resource base in the Lower 48. The Remington guys in their presentation today had no excuses for the $2+/mcf finding & development stat in their press release yesterday. They basically told us to get used to seeing F&D costs of $1.75 -- $2.25 an mcf from now on, and the days of $1.18 finding costs (their average for the 3 years prior to '02) are now just a fond memory.

Now if it costs you 2 bucks to find the stuff, say $.70/mcf to produce it, and say $.40/mcf for general and administrative expenses, what company is gonna stay in business if gas prices go back down to $3 and stay there for very long? I haven't even included anything for interest expense.

Some may say REM's F&D costs are an aberation, that there are plenty of companies reporting F&D rates in the low dollar range, and RRC just put something out with $.93/mcf finding costs I believe. But I believe if you look closely at those companies you will find that that includes acquisitions, and they were fortunate enough to buy reserves early in '02 when natgas prices were so low, which allowed them to pay such a low price to get those reserves.

So, a long-winded way of telling you that IMO we ain't gonna see < $3 gas again no way no how.
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