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Gold/Mining/Energy : Swift Energy (SFY) -- Ignore unavailable to you. Want to Upgrade?

To: FloydP who wrote (871)	8/18/1999 6:01:00 PM
From: Mark	Read Replies (1) \| Respond to of 1602

Floyd, The "buying panic" scenario is simply something that I was pondering. I like to dream up different scenarios and then try to work out their probability. Someone like Joe who is involved with the futures professionally helps to establish the reality. The "scenario" that I was thinking about runs somewhat as follows - 1) We know that NG production and consumption is "localised" - i.e. unlike oil, NG cannot be imported easily. 2) We know that demand for NG is increasing - lots of new houses being built with NG heating, and new power stations being NG based due to capital costs and environmental concerns. 3) We know that NG prices were driven to low levels at the start of this year due to slight oversupply (caused by two warm el-Nino winters), but mainly because oil prices crashed. 4) We know that low commodity prices caused variable cost (i.e. drilling) cut-backs in E&P companies. 5) We know that NG wells deplete relatively quickly and that drilling is required to provide new wells to replace depleted ones. OK, so those are the foundation points (SBO!) It has been proposed that all the drilling cut-backs will cause supply reductions which will presumably lag by some delay from the actual slowdown in drilling. It occured to me that this time delay will be measured in quarters - i.e. it takes many quarters to drill exploratory wells, and to drill and plumb producing wells. Lets assume that up until the middle of last year we had a steady-state or improving condition - i.e. that old/depleted wells were retired at the same or slightly lower rate that new wells were created. If suddenly all new activities had been stopped (but started projects were continued to completion), you would see NO declines until this "many-quarters" time delay. In other words, if the drilling world had ended mid '98, it wouldn't have shown up in output until sometime this year. Furthermore, the fall-off would start off slowly, and would accelerate (presumably exponentially). Now, in reality, the drilling world didn't end suddenly in the middle of last year; things just got progressively worse as commodity prices declined. The low point in drilling was probably in Q2 this year. So, bearing in mind the "several Q delay", the decline in NG production won't bottom until the end of this year or H1 next year. Any declines we have experienced over the last few weeks are just the start..... Now, a further complication (bonus!) is that when oil prices were low, some NG consumption switched to oil. The "natural" pricing ratio between oil and gas is around the 6x to 7x levels. So, with oil at $11, NG had to be priced at around $1.60 to be competetive. Since NG never really got this low, oil was the fuel of choice for those who could switch. The result contributed to the build up of NG stocks. Since oil prices have been driven up to $22, the natural price for NG is around $3.30. Because NG is presently less than this, it is easy to conclude that NG supply still exceeds demand (or that this is how it is perceived). However, after a lot of "contract unwinding" I think that demand has now picked up for NG because it is so cheap, and this is what has mainly driven the recent low AGA injection levels. So, we are now faced with two interesting prospects - 1) NG still being relatively cheap encouraging demand, 2) Production fall-offs over the next few Qs, Joe says that the commodity traders are not very forward looking, which suggests that they will ignore anything "over the horizon" - at least until it can no longer be ignored. Low (relative) NG pricing at the moment does not suggest that traders think there is a shortage looming, however it seems there is a good chance that events will overtake this opinion. If so sentiment will sometime "flip". The change could easily be a typical crowd response, and will likely seem like "panic". One milestone that could change sentiment is the AGA storage level for winter. I am amused to see that injection levels seem to be (increasingly) below expectations, and that we are getting closer and closer to the milestone date. The necessary injection levels are going up and up. At some point it will become clear whether or not we will get there, and if we don't, then it will be easy for the "production decline lobby" to say that this is just a symptom of a looming bigger production problem. I'm not sure how well I've explained this. The bottom line is that I can see a scenario where we have an accelerating shortage, and that given a typical crowd response, this could be ignored until we get a flip of sentiment...... hence my "panic" comment. I personally believe there's a very good chance we will see $4 NG before February. This would make any NG producer VERY profitable. Given SFY's haste to raise cash, I suspect they believe in such a scenario and are desperately trying to raise output so they can capitalise on this. Just a guess. Mark