" nat gas prices in the midst. there's a surplus hurting the commodity's price. gary kaminsky has more on this story. gary? melissa, thank you very much. if viewers have listened to the advice of rob raymond in terms of nat gas, they have been very successful investing indeed. rob, let's get right to it. you had the call on nat gas. what do you see now for the next several years? well, i guess to go back and level-set the conversation for a minute, our negative view on gas has been driven by the concept of disruptive technology. i think sort of the sign posts along the roast are that disruptive technology is alive and well. front month gas prices, future dates, three and five years out have all effectively collapsed at this point. in the near term, we think there's going to be a lot of additional pressure in the gas market through the course of the summer and into the fall. we wouldn't be surprised to see nat gas trading down to $1. worse from here. long term it sets up a consolidation in a rebound in the commodity price. but importantly to a world where prices are probably lower for much longer than people have historically thought they would be. importantly, in the capital structure of any company, there's equity, the stocks and then there's debt. i know when you look at the natural gas companies, it's very important to look at the entire capital structure. we look at esco, natural gas producer. they essentially downgrade the debt. the equity has obviously suffered. talk to me about the future writedowns in terms of the value of the natural gas assets that all of these companies are holding and what you anticipate there. well, that's a great question because the energy industry is very capital intensive. access to capital and the cost of that capital becomes very important. what we're really going to have to go through -- we're in the early innings of a process where any company that has a bunch of dry gas reserves on their balance sheets, you have to determine what they're really worth. you brought up the case of exco that's relevant as a result of the downgrade last night. the issue becomes, it's the majority of their assets are -- in a world of the sound bite here, the questi here, the question ultimately becomes, what is the intirinsic value of that. it's sort of two different worlds. it's the credit side versus the equity side in the case of exco. but it isn't unique to exco. but their 2018 paper is trading at a lot more pain to come"
What is the Natgas act going to do between now and a year from now? Are you hoping mail trucks will run on nat gas? How long will that take? Don't rely on government for anything.
It's all supply and demand and the economics of conversion.
In the short term be very afraid.
CHK has cut 500 mfc/d and will cut 1 bcf/d should front month pricing stay low. CHK is the largest gross producer and the second largest net producer of ng. CHK has also been responsible since 2005, for over 30% of total US ng production growth. With CHK continuing to stack out, although the gross production may increase, especially with drilling for ngls, in that Methane is an obvious side effect, the RATE of increase will no doubt slow. Industrial and residential demand will grow at a higher level than this rate of increase, barring another total recessiion. This will strengthen the back months of the futures chain, and increase the storage cushion. Implied volatility for ng is at present $1.81 on the downside and $4.01 to the upside. We are thus at or near a bottom. It will probably remain within this same range with an overal average price of just above $3 for 2012, for the rest of the year (see EIA) and begin to tip up in 2013. At previous times of ng gluts, weather has proven the defintive factor. Thus, the upper end following shoulder season, will be determined largely by the number of CDDs (cooling degree days) in the summer. But suffice it to sya the "gas going to zero" theory is...wrong. We will not have a quick "snap back", but rather a slow improvement over the next two years. Then one might after that time see a spike what with higher oil pricing in that one wonders at what price will be needed to induce folks to grow back into ng when ngls and oil yields so much more in terms of overall margins, $6? $8? $10? But such is not in the cards until 2Q 2013.
I agree with what you say, except the snap back could be a lot faster than you think. With rigs getting laid down, there is going to be very little new nat gas production that isn't incidental to oil and ngl production. To entice the rigs back, you're going to need a much higher price as you say because nat gas now competes with oil. It didn't before because most of these companies were drilling for the sake of holding land or because they didn't have optionality to switch to oil. The land is held and most if not all have oil property to drill.
Like any other chart, if nat gas price fall below $2 support it's going to get really bad. It will be 50 degrees in the midwest next week, the area of the country that uses the most gas for heating.