<<Natural Gas -- Up Up and away! Natural gas bulls say market has nowhere to go but up Moribund 2007 results may set stage for impressive rebound in '08 Gary Lamphier, The Edmonton Journal Published: 5:30 am
EDMONTON - Few Alberta natural gas producers will mourn the passing of 2007, a year that brought a bumper crop of bad news.
With a bulging inventory glut -- now roughly eight per cent above the five-year average, for this time of year -- overhanging the North American market, natural gas prices remain stuck in neutral.
At Wednesday's close of $7.17 US per million British thermal units (MMBtu) on the New York Mercantile Exchange, U.S. gas prices are nearly 50 per cent below the last cyclical peak of $14, reached in October 2005.
Most forecasters expect prices to remain in the ditch. Patricia Mohr, VP economics and commodity market specialist at Scotiabank, calls for NYMEX gas to stay flat next year, averaging just $7.15, roughly on par with 2007. Mohr is set to release her formal 2008 commodity price forecast today.
"Natural gas prices are going to stay quite subdued relative to crude oil, which I think will stay exceptionally high throughout 2008," she predicts.
Although Alberta's natural gas output is falling, she notes, exports to the U.S. remain high as inventories get drawn down.
At the same time, Mohr expects supplies of imported LNG -- liquified natural gas -- to rise in the U.S. in coming months, even as additional conventional gas comes onstream, thanks to pipeline additions in the U.S. Rockies.
The bottom line? Mohr doesn't expect a rebound in prices until 2009, at the earliest. Other analysts are similarly pessimistic.
<<The supply glut isn't the only issue facing producers, of course. The soaring loonie, high drilling and operating costs in Western Canada, and the prospect of higher Alberta royalties in 2009 have prompted an exodus of investors.
The Toronto Stock Exchange's main energy index closed Wednesday at 338.88, up just 4.4 per cent on the year, and well below the 52-week high of 373.89.
The TSX's battered energy trust index has performed even worse. It closed at 159.52, a hair above the 52-week low of 156.28.
The depressed environment has left some cash-strapped juniors and energy trusts unable to fund their drilling programs. Analysts expect a frenzy of industry consolidation this winter, as stronger players snap up weaker ones.
Now, with tax-loss selling season peaking, many hard-hit natural gas-weighted energy issues have been thumped again, leaving some stocks at or near their 52-week lows.
The flip side of the argument? Some contrarians say these are precisely the conditions they've been waiting for. The torrent of bad news today -- low prices, falling drilling levels, sagging production -- is setting the stage for a vigorous rebound next year, they argue.
In fact, they already see reasons for hope.
With gas prices depressed in North America, LNG supplies have been falling in recent months, as LNG gets diverted to stronger markets in Europe and Asia.
At the same time, demand for gas on this continent continues to grow.
In a recent long-term forecast, for example, Calgary's Ziff Energy predicts demand for natural gas in North America will rise by 1.8 per cent a year through 2015.
Winter weather is another major wild card, and the early signs suggest this winter could be a chilly one.
"Various forecasters are calling for the coldest winter in the past decade due to the La Ni?a phenomenon," says a recent report by Calgary-based Schachter Asset Management, which covers energy stocks for Toronto's Maison Placements Canada.
"The result could be multiple weeks of (high natural gas inventory) withdrawals in the December to February window, which would quickly eat through the current inventory overhang."
With Western Canada's natural gas drilling levels at five-year lows, it's only a matter of time before the U.S. supply-demand balance tightens and prices snap back, the bulls argue.
Schachter energy analyst Jason White says his firm expects natural gas prices to hit the $9 level by the fourth quarter of 2008. Among senior producers, White's favourite pick is EnCana Corp. His junior stock picks include Delphi Energy, Tusk Energy and Accrete Energy.
Meanwhile, Peters & Co. has a "sector outperform" rating on the shares of ProspEx Resources, NuVista Energy, ProEx Energy, Bonavista Energy Trust, EnCana Corp., and Orleans Energy, among others.
The best-performing major TSX stocks of 2007? Potash Corp. topped the list, with a gain of 122.4 per cent, followed by BlackBerry maker Research In Motion (up 102.3 per cent) and Fording Canada Coal Trust (up 64.4 per cent), according to Canaccord Capital.
EnCana was the only energy stock to make Canaccord's top-10 list, with a gain of 27.7 per cent. Meanwhile, tech giant Nortel Networks -- a repeat offender -- led the list of big-cap losers, with a decline of 49.6 per cent.
Other losers in 2007 included Loblaw Companies (down 35.5 per cent), Cameco (of 25 per cent) and Teck Cominco (down 22.5 per cent).