Natural gas futures set a new five-year high this week, but judging from energy company hedging strategies, it’s not likely to last.
Bill Herbert, managing director with energy investment bank Simmons & Co. International, says last fall small and mid-sized companies pumping natural gas out of the ground had 35% of their 2014 output hedged at a price of around $4.11 per million British thermal units. Today, roughly half of them have hedged at $4.22 for this year.
The switch indicates that despite natural gas futures reaching $6.149 on Wednesday, companies are still betting prices will quickly fall back to earth when warm weather returns.
Morgan StanleyMS +1.28% analysts concurred on Thursday, saying the market would do well to remember what happened last year when a late-winter cold snap boosted the price of gas more than 35% to $4.40. Prognosticators quickly predicted gas would soon top $5, but that didn’t happen. In fact, by last summer the gas price had slumped back to $3.30. That’s in part because a lot of demand comes from power plant operators that can switch between burning gas or coal. As soon as gas prices spike too sharply, power sector demand for it evaporates.
“Given that nothing has changed structurally in the gas market a similar situation could play out again in 2014,” Morgan Stanley said in a note to clients on Thursday.
The bank expects warmer weather in the coming weeks will drag the gas price back down. But even if it dips as low as $4.35, many power plant operators would still be convinced to buy coal instead, further keeping natural gas prices in check, Morgan Stanley said.
That level would still provide plenty of incentive to keep drilling new wells, too.
Cabot Oil & Gas Co.COG -1.97%, the second largest natural gas producer in Pennsylvania’s Marcellus Shale, is relentlessly cutting its drilling costs, slashing them another 10% per well in 2013. Some cost savings came from running the company’s trucks on lower-cost natural gas rather than diesel fuel.
“This is the reason we can break even, or even deliver a return on a well, if gas prices push down to $1.20,” Cabot Chief Executive Dan Dinges said.
But Cabot competitor Range Resources Corp.RRC -0.07% warns too much drilling, however cost-efficient, could crater natural gas prices by adding too much supply too fast.
I'd say you R correct that down side risk in minimal. But upside is questionable. Old management made ECA a sick company and it will take years for recovery. PE is way to high.
Your random thoughts may seem logical, but also may be the same as throwing a Dart. Not a good investment plan.
I doubt it. Exxon has more NG undeveloped reserves than USA can use in next 25 years. They are loaded. ECA is far from owning limited NG reserves. They are abundant on many many small to medium company balance sheets. Sure ECA can sell but won't get much above book value.
And U will do fine in 3 years or less.
U CAN'T Can U?
you all could be Obama doubles. So sad.
You must be looking in a mirro on your head, , I.e. the opposite of looking up is DOWN. They beat earnings substantially, yet stock market says NO WAY!
Stop wasting your HOPES. Aretha is the Maco Fact.
Yes, ECA may get to $19.75 to $20 in next 12 months. But my point is and was that ECA versus the rest of the market would way way under perform the last 16 months and $$ invested elsewhere better else placed elsewhere. Thus a no brainier. It was so oblivious. Even going forward from here $$ should still go elsewhere. ECA may go up 8% to 10% in next 12 months but that is it and will at best stagnate there. Still a poor PE going forward. The gamble on Liquids is just that, A GAMBLE, not good factual rational. On the flip side, ECA could go down 10% to 15% if Liquids don't pan out. high risk for a 10% pop.