I'll have to dig up the cash flow figures for you later. Meanwhile, here's an excellent story from Barrons.
BARRON'S-Natl Gas, Rig Utilz'n, Bottom Search&Why!
Gas Tanks Too Full? Output cuts should firm prices [HEADLINE]
By Cheryl Strauss Einhorn
[Initial paragraphs dealt with grains]...
>>Eventually, though, today's pain and penury may lay the basis for tomorrow's bull markets. In some commodities, such as natural gas, two tales already are developing -- the divergence between short-term and long-term fundamentals. Result: An opportunity to sell nearby gas futures and perhaps to buy the January 2000 contract.
>>At present, April natural-gas prices are trading at new contract lows at $1.65 per million British thermal units, their lowest level for the month of February since 1995. Still, "we need another leg down to $1.50 in the 'shoulder month' contracts of April or May," says Schroder gas analyst Bill Featherston, referring to the span between the winter heating season and the summer cooling period. "But looking out to next year, the January contract at $2.35 doesn't seem expensive," he says.
Driscoll is even more enthusiastic about the long-term view. He thinks gas could average $2.10 for 1999, which is up 5% from his earlier '99 outlook. Next year, he optimistically thinks gas prices will average $2.75, or 17% above his prior 2000 forecast just months ago.
The reason for the change in the gas outlook is the same as it was for hogs months earlier, which itself is the same for every business that loses money over a period of time: The pain threshold was reached.
"The gas companies are in such sorry financial shape," says Driscoll, who claims things haven't been this bad for the industry in a decade. Result: "These companies can't put money to work to increase production now." Thus, while natural-gas drilling has been declining in tandem with falling prices all winter, the decline actually is accelerating now.
The rig count has fallen from a peak of 650 in December to 420 last week. "We expect it to bottom below 400 before turning upward later this year," says Driscoll. He points out that it takes approximately 525 rigs just to maintain current gas production -- a count far above typical drilling activity, which has averaged just over 400 this decade.
But the industry averaged 565 rigs in 1997 and 562 last year. Yet
despite the jump in rigs during those years, the resulting production increases were only 0.6% and 0.3%, respectively, in part because new technology allowed companies to tap gas reserves more efficiently. This allowed companies to deplete reserves more rapidly and boost their net present value.
Surprisingly, though, those very modest production increases were enough to satisfy demand the past two years given the unusually warm winter weather in the U.S. and increased imports from Canada.
Now with the rig count down so sharply, natural-gas production is likely to fall throughout 1999 and into 2000. Driscoll estimates the year-over-year decline should grow from 400 million cubic feet per day in the first quarter of this year, to over one billion cubic feet per day by the second half of next year.
Tightness should begin to manifest itself by mid-year. Consequently, "sharply higher prices should follow," predicts Driscoll.
Near-term, though, prices remain under pressure because current storage levels of gas are massive. They're over 700 billion cubic feet above the five-year average with only about six weeks of winter left.
Given that the last two winters have been among the warmest in over 100 years, and that storage levels are quite sensitive to the weather, it's not likely stocks will be drawn down much.
Still, it is interesting to note that on the few cold weeks we've had this winter, when we've needed to draw down storage, we've done so at the same rate as in cold weeks last year, meaning that the market's underlying supply-demand relationship has not changed.
Once again, low prices are proving their own best cure by bringing supplies in line with demand. |
