Production has remained stubbornly high, even though rig count has been below 500 for weeks-some analysts have said below 750 should have curtailed production others have said below 500. Part of the reason is that wells, drilled previously, were waiting for pipeline capacity to be built out to them, are now flowing-increasing the supply. This process is suppose to peak in Dec and fall off, quite a bit by Jan. Also, winter so far across the country has been warmer than average.
After bottoming at $1.90 in April, peaking at $3.93 in Nov, I have predicted that prices will pull back to $3.10-$3.25 to form the next bottom. Nat gas stocks, you would have thought would have rallied since April, but have not. Still because of the rally in prices, nat gas producers have improved their fundamentals as they have been able to lock in $4.50+ futures prices (for some of their production)-insuring positive cash flow for much of 2013-14.
Unfortunately, given the "warm" winter so far, I do not expect nat gas prices to spike this winter, but I do expect inventories, now about equal with last year, but still 8% higher than the 5 year average to be whittled down starting in Jan. This should set up gradually increasing prices throughout the year, with a target of $6+ sometime the winter of 2013-2014.
The underlying "assumption" is QE will continue through the winter of 2013-2014-keeping all prices up and FED financed deficit spending (subsidizing current consumption) up as well. It this assumption hold true, I am worried about it as QE could end before next winter ends, then nat gas stocks will be one of the best sectors in 2013.
Nat gas is cheap historically and vs oil. With oil at $90, the energy equivalent of nat gas is $15. So, nat gas at $6 is still only 40% of the cost of oil based energy products. Also, nat gas demand y/y continues to grow as power, transportation and chemical industries continue to ramp up usage.
Bottom line, I will be looking to increase nat gas stock exposure when nat gas is in the $3.10-$3.25 range.
When one is wrong, I have been early i my NG stocks call, then one is liable to do more homework. So, I went back a reviewed the "weekly" NG reports from the EIA since Nov of last year. Although the government skipped weeks 12/27, 1/3 and 1/14, from the partial data, I can conclude the following. For 2 of the 3 reported weeks in Dec production was down vs November. This could be potentially "bullish" news as November was another all time record month for production. Data for December will come out in the EIA's monthly report on 2/28. Looking Jan's partial data, it can be concluded that Jan production will flat to down from December.
In conclusion, the month after month new record production highs should have ended last Nov. So, with production flat to down, the tone of NG prices should improve-confirmation will come the end of Feb with Dec production #s and the end of March with Jan's production #s. Of course, sustained colder weather would help on the demand side, but it is increasingly looking like inventories will be under 2000 when the heating season ends. Not quite as low as the 1800 long-term average, but substancially better than last year's approx. 2400. However, unlike last year capX spending and rig count have already been falling for a year plus, so the prospects of increased supply remote, more likely production will be flat to down-the rest of 2013-surpluses will be drawn down to deficits, sending prices for NG up.
commandor, the following quote is cut from the recent UPL earnings cc where UPL's CEO discusses assumed reductions in recent industry NG production. It supports your view; only the precise timing is uncertain.
The Buckingham Research Group Incorporated
Okay, that's helpful. Mike, I guess the question -- my final one is, I want to believe in gas prices, but you're a pretty observant guy and in the circles. Why do you think U.S. supply is falling? I think it is, but any color on that would be appreciated.
Michael D. Watford - Chairman, Chief Executive Officer and President
Why? I mean, I think it's falling because people are withdrawing capital. We're not the only ones that have reduced capital. We were probably earlier and more aggressive just because we're 100% natural gas. But our big partners, Shell and Anadarko, have seen the wisdom of withdrawing capital from the dry gas plays. And it takes a long time to make the decision to withdraw capital and shutdown those rigs or move them to a different area. But once you do it, if it's sticky on the way down, it's going to be a whole lot stickier on the way up, because you're not going to want to commit capital and go get permits, and build locations and sign new rig contracts, and get crews and redirect your staff, until you know that you can put forth a pretty significant capital program over several years. So gas prices going from $3.25 to $3.75 is not going to get anything done. And so there's no doubt that tremendous amount of capital has been withdrawn. And all the international JVs, all those things are nearing their end in terms of outspending cash flow by gross amounts. All that just means less and less CapEx. And we have declines. This stuff declines, people don't understand that, and they want to put a light switch to it, where you just flip the switch, where rig counts drops, they want to see production drop. It doesn't work that way and it's not going to work that way, when rig count goes up, production's not going to go up. So there's no doubt in my mind that production is declining. Whether it's declining rapidly enough to get us closer to balancing with demand, I mean, we're not there yet. That's clear. But when you have days like yesterday, where you have a pretty good storage withdrawal number, but it's not quite what the average was and you have a significant falloff in gas prices because money flows in the futures markets, it's just kind of you scratch your head and say, okay, where's the fundamentals of the business? And there are no -- I mean, if we are one of the low-cost producers in the U.S., if not the lowest, and you see what happens to our reserves at $2.63 gas, and you see what happens to our business, then how can anyone else even begin to invest at $3 gas? If you're really looking at fully loaded corporate cost, not just individual unique wells. So I'm -- there's no doubt that there's tremendous amount of capital has been redrawn. And you'll see that as you continue through 2013, what I really think is going happen is, you're not going to get enough gas price response throughout '13, so you're going to have 2014 with the same lack of capital being invested. So we'll have 2 years of decreasing production. So we'll see if we get there or not.
commandor, I sold DVN today for a 20% ST gain after its recent spike. Perhaps early but I'm determined to harvest gains in this market. Are you holding DVN? Any opinion on buy & holding NG stocks for the longer term? I continue to hold UPL. TIA
Sold some DVN today myself.
I've been early on NG stocks for over a year on "core" positions, while being active with "trading" shares. For me it is just a matter of when NG prices start moving up to $4+ on a sustained basis. Frustrating that watch has been new monthly production records for just about all of 2012-the last monthly data being Nov. Chances are Dec will also show a new record as Marcellas production is growing faster than other fields are declining-Dec numbers will be out the end of Feb.
However, some recent weekly data has suggested that Jan production will be down y/y vs Jan 2012. If this is so, then NG will start its bullish move that should last years. My strategy, in recent weeks, has been in increase positions in ECA, WPX, UPL, BBG when they have been at recent lows of their trading ranges and keeping my "core" DVN.
So, yes, I am long and looking to buy more as NG is setting up for a classic demand/supply situation where new supply, as measured by increasing rig count, won' be triggered until NG is sustaining above $4. Looking for $6, by the end of winter next year. At $5+, just abut all NG stocks should be up 50-100%.
Nat gas did pull back to $3.09-$3.10 on 1/9 completing a 62% Fibinatti retracement level from its recent high of $3.93 ( late 11/12) from a base earlier in 2012 of $2.60-1/11 it is above $3.30, I think nat gas has made its low for many years to come. My favorites: ECA, DVN, WPX and UPL are still all cheap as are the vast majority of NG stocks. I continue to accumulate inventory near the low end of their recent trading ranges: ECA $19.50, DVN $51, WPX $14.50, UPL $17.50. Still, with inventories near record highs, for this time of year, any NG price move of enough magnitude to help the stocks is perhaps months to over a year+ away. Truly an "investment" theme to buy inventory when no one cares and the consensus sentiment is quite bearish.
NG now in the mid $3.40s range as cold weather has been forecast into next week. I think the recent $3.09-$3.10 price range is the bottom for years to come. From my estimates, weekly draw, for the next 3 weeks will be 110, 140 and 200, which will take inventory levels near 2800 by the week end 1/25. Last year inventories ended draw season at 2300 vs normal-closer to 1800. With 11-13 weeks left in draw season, after the week end 1/25, there is a good chance that this year's inventory will be close to the historical average of 1800. Couple that with demand consistently up y/y, and some wells closed, potentially reducing supply, NG could get to $4+ and stay there. Higher prices would need a hot summer and/or another normal winter. Many producers have stated they would not put wells back into service until $5.00 In any case, sustained NG price above $4, has to be bullish for the stocks. Bought some BBG near its double bottom of $17. BBG is a new addition to favored NG plays.