₪ David Pescod's Late Edition February 14, 2008
TUSK ENERGY (T-TSK) $1.74 +0.02
DELPHI ENERGY (T-DEE) $2.13 +0.01
NATURAL GAS $8.78 +0.35
CRUDE OIL $95.28 +1.87
I guess it’s time we take one last look at natural gas because we’ve been talking about it so much lately, but a review is possibly in order. From a high of two winters ago when we saw natural gas prices at $12.00 to $15.00, we saw a time of much joy in the gas patch. However, since those times, things have been brutal.
The high prices for gas attracted record high land prices for those that were looking for land for new exploration plays. With the demand for rigs, rig rates went through the stratosphere and made it expensive to do anything, plus there was a lack of personnel to get anything done. Then of course the sector got hit with low gas prices as warm winters reduced the demand for the product. As if things weren’t as bad as they could get, Alberta’s Premier Stelmach decided this is great time to have a royalty review and increase taxes. The absolute worst thing that could have happened for the sector.
Now things are tending to get a little bit better as suddenly the firms that owned the drilling rigs have discovered that it’s much better to charge a lower rate and at least be busy, than have nothing going on at all. Currently, rig costs are 30% to 50% lower than two years ago.
Also, because the big guys (the Encana’s and the big companies of the world) are cutting back their exploration, it’s making rig and personnel available and if you are looking for new land for exploration plays, suddenly it’s there and it’s much, much cheaper. So things might be starting to look just a little bit better.
It’s still open to debate and not everyone is convinced as today, Warren Verbonac of Octagon, steps in for the debate on natural gas prices and writes to Octagon clients, “Although we do not believe futures prices to be very good forecasting tools (particularly when looking at the absolute numbers, relative changes may be more meaningful), a close look at this week’s futures prices relative to the same week last year, shows more pessimism towards the near-term gas prices.”
He writes, “After a disastrous Q2/07, AECO prices have steadily climbed since last September to equal the highs set a year ago—about $7.75/mcf.”
“However,” he writes, “this week’s forward markets, as compared to those of a year ago, are more pessimistic, pointing to another difficult Q2 as we exit the winter heating season:
• The current March 2008 price of $7.65/mcf is less than the year-ago similar contract of $8.40/mcf.
• The current AECO twelve-month strip is $8.00/mcf vs. $9.30/mcf a year ago.”
He concludes, “In summary, the outlook for oil and gas commodity prices favors oil, and most of our coverage is to oil-levered companies with high-impact exploration programs.” He also mentions that for forecasting purposes, “We are using US$75.00/b. A switch in investment themes to domestic gas companies seems premature.”
Well, one thing is obvious, we are going into spring when demand for natural gas tends to fall off, but still, there is evermore optimism being generated in the natural gas patch. How is it premature? Good question. It was interesting to see the response to our recent article with Josef Schachter who was commenting on natural gas. We had several queries on what his target was for Tusk Energy, one of his favorite gas plays over the next 12 months.
Poor Debbie (of Deb’s Ditty fame) managed to rouse him out of bed in Las Vegas this morning to find out what his target was (sorry Josef) and we are sure Schachter is in Vegas talking about oil and gas, don’t you think? (Surely, not losing some Oilexco winnings on the table, right?)
It turns out that courtesy of Maison Placements, his target is $3.20. Needless to say, if he is correct on that, that would be a nice win.
However, if you had a crystal ball that could predict weather, you’ve got the only tool you need for natural gas. If we are going to have hot summer and big demand for airconditioning, followed by a cold winter and need heat in North America, load up on gas stocks. If the opposite is true...forget the sector.
CORRIDOR RESOURCES (T-CDH) $6.40 +0.19
Corridor Resources has a chart like many other resource stocks over the last couple of months...it’s been halved, although this is one of those stories that we wonder about whether the market was right there or not!
Based on 40 million cubic feet a day of production and hopefully by the end of this year, hitting 70 million, this stock might well look cheap and it’s only a short pipeline away from the premium markets of Boston and New York.
But the reason Corridor should be on your screen and you should be watching it, is because they are drilling into the McCully now and should have results on the Dawson Settlement sometime shortly. The Dawson Settlement on seismic shows a structure with a potential to hold three to five TCF of gas, an absolutely enormous target. Of course, unfortunately, you always have to drill it to see if it’s actually there...or not.
Also unfortunately, have you ever noticed a big play that ever gets done on time? Andy Gustajtis now suggests that we won’t know whether the good stuff is there or not until mid to late March.
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