Be interesting to see the picks -natural gas prone producers - against that of this thread - ???
Light Ahead for Natural Gas
By Alan Gaines
Fundamentals for natural gas appear to be getting the attention of the pipeline and E&P industry, given yesterday's (Sunday) announcement that Columbia Energy Group (CG-NYSE) has offered to purchase Consolidated Natural Gas (CNG-NYSE) for approximately $70 per share ($24.50 in shares of CG, with the remainder in cash), or $6.8 billion. This exceeds an earlier offer by Dominion Resources (D-NYSE) which totaled $6.3 billion.
During the past six months, it seems as if crude oil prices have garnered the lion's share of attention with respect to stock market related impact. Natural gas prices have gotten swept under the rug. Of late, natural gas has also staged a comeback, sparking renewed optimism among producers. Spot and futures have risen sharply, despite mediocre (at best) fundamentals. The NYMEX Henry Hub 12-month strip (based upon a simple average of settlement prices) has risen meaningfully over the past month, to approximately $2.30 mmbtu, from $1.99 mmbtu in mid March. The surplus of working gas in storage is higher than one year ago, but seasonal temperatures will lessen demand entering into the slow summer cooling period. In other words, this rally is not likely sustainable.
However, longer term prospects for natural gas appear bright. Drilling rigs looking for gas continues to lag at three year lows, down almost 40% from one year ago. Power grid operators are concerned that electricity supplies will be tight this summer. It is also possible that hydroelectric output from Northern California may not meet demand. In addition, crude oil prices have exerted upward pressure on residual fuel oil, which competes directly with natural gas. Low sulphur residual has topped $2.00 mmbtu at NY Harbor, versus less than $1.80 mmbtu one month ago.
I also believe that reduced capital outlays on deep water exploration and production in the Gulf of Mexico over the coming 18 months could have a negative impact on domestic deliverability within a one or two year timeframe. The decline in shallow water production will outweigh any potential production increases emanating offshore from deep water. Production of natural gas from GTulf waters less than 1,000 feet peaked at 14.5 bcf/d in early 1997. It is presently averaging some 12.1 bcf/d. On the other hand, production from Gulf waters deeper than 1,000 feet rose to 1.6 bcf/d in 1998, as compared with 1.1 bcf/d in 1997. I anticipate deep water output will accelerate during the coming three years, perhaps growing to better than 4.0 bcf/d in 2001. The lower trend regarding shallow water production will likely continue through that time period.
Lower deliverability has, in essence, been masked by very mild winter weather since 1996. Deep drilling in shallow water must be increased in order to stem the tide of questionable deliverability. Directional drilling, better fracing methods and completion technologies will help produce more gas from a singular wellbore, shortening the productive life of fields. Depletion rates for new natural gas wells in the Gulf have increased to a dangerous 49%, from only 17% in 1970. Almost 80% of all shelf (shallow) production comes from wells less than six years old. In order to maintain current output levels, offshore producers must drill and successfully complete some 1,000 new wells in the Gulf alone in 1999, and in excess of 1,200 wells in 2000. This is probably unlikely. Gulf of Mexico natural gas production will remain flat, at best, for the coming three to five years, in the face of growing demand. It should be mentioned that two thirds of deep water production over the past three years has been crude oil.
I still believe that natural gas producers will fare better than their crude oil brethren during the coming 12-18 months, due to stronger supply/demand economics. In my next column, I will highlight a few MicroCap natural gas prone producers which should outperform the field. |
