Bill Powers' book contains a well researched analysis of the North American gas market.
Last summer when he published the book, natural gas prices had just sunk to less than $3.50 and his book was looked upon as an unlikely scenario according to the experts at the EIA and Platts with prices around $4 for the next several years.
Considering that the oil and gas producers have been losing their shirts on cheap natural gas and shifted budgets to oil and liquids for the last 18 months, his predictions of a natural gas crisis until sustained prices over $6 give the producers a new incentive to drill more dry gas wells is the most likely scenario for the next couple of years.
Keep in mind that his main short term prediction is that prices will bounce between $5 and $7 until the producers start new large scale dry gas drilling programs.
After being badly burned in 2012, the producers are not going to be in any hurry to devote drilling budgets to gas from the profitable oil plays so 2014 promises to be a volatile year for natural gas.
TER: Canada's gas exports are blocked to the south, east and west. What does that mean for the future of its gas producers?
BP: Blockage is not the problem. The U.S. has imported gas from Canada for over 35 years, but Canadian production had declined significantly over the past 12 years before flattening out in 2013 at around 13 Bcf. U.S. exports were down substantially over the last five years, so there's plenty of Canadian export capacity into the United States; it's just not being used because of low prices and the significant decline in Canadian production. There's plenty of Canadian export capacity into the United States, whether it's from the Alliance Pipeline or from Nova Scotia via the Maritimes Pipeline. That's nowhere close to filling the hole due to very poor exploration results offshore Nova Scotia and resistance to the further exploration of shale in New Brunswick.
The reason Canada will greatly reduce its exports to the United States over the next five years is it's building out an enormous capacity in British Columbia to export gas to Asia. Petronas bought Progress Energy Canada Ltd. for $5 billion ($5B) and is building an $11B facility in British Columbia to export gas to Asia. We're going to see numerous applications for LNG export facilities approved in the next several years, and we're going to see a huge buildout in British Columbia to export gas from the Horn River Basin and the Montney to Asia.
We're also seeing booming demand for Canadian users. Demand for the oil sands has gone from about 1.5 Bcf per day (1.5 Bcf/d) toward 2 Bcf/d. We've seen fertilizer plants open in Canada due to the low natural gas prices and the high prices for fertilizer. Due to the decline in Canadian production over the last 12 years and increased demand in exports to Asia, the United States will be left with a very unbalanced market. It's certainly going to lead to higher prices, because Canadian producers just now have been able to stabilize their production
Right now, there are very few companies that make money even at $4/MMBtu. We saw that from the financial statements of all the big shale gas players; even at today's prices, it's still not that economic, so we will not see increased natural gas-directed drilling until prices are closer to $6/MMBtu. This leads us to another issue that I think is not widely recognized: In 2008, the last time we saw a sustained spike in natural gas prices, we had 1,300 to 1,600 rigs drilling for natural gas and about 350 drilling for oil. Now that is completely reversed in the United States. For companies to drop oil-directed drilling rigs and move them to natural gas, we will need to see some significantly higher prices. I think that will lead to further imbalances.
TER: Baker Hughes Inc. (BHI:NYSE) has acknowledged that the number of gas and oil rigs is no longer the measure of production that it used to be because so many laterals are running off each pad now. Are you accounting for that?
BP: Yes, absolutely. While there is no doubt rigs have become more efficient and pad drilling has had a lot to do with that, a factor that is very difficult to quantify is the quality of rock into which these laterals are being drilled. Anyone who's familiar with the oil and gas business can tell you that the best wells will be drilled first and that you will drill into progressively lower-quality rock. While you can drill numerous wells off one pad, you still are going to need more rigs as you drill into lower-quality rock. We've seen increases in production in areas like the Marcellus, but a lot of this has to do, as I said earlier, with the completion of inventoried wells—wells that were drilled but waiting on completion. We are going to need a lot more activity in natural gas-directed drilling to keep production flat.
TER: The pipeline companies have acknowledged that there's a supply constraint. Haven't any of them made plans to extend lines to the Northeast?
BP: Yes, that is happening, and some of them are probably going to increase throughput from the production growth in the Marcellus, but there will be significant calls on Marcellus production, which is probably going to peak this year.
The U.S. Energy Information Administration late last year put out a white paper that talked about how gas production is becoming more efficient. But this white paper did not include the Barnett Shale, which is in steep decline now. It's true, efficiencies have been gained over the last several years, such as the way fracking has changed, and operators are becoming more efficient in fracking, with longer laterals. But what is really happening is the completion of the inventory of previously drilled wells.
When companies ramp up their drilling activity, they often will drill more wells than they actually complete due to lack of pipeline capacity. Just recently, there have been about 200 wells in the Marcellus that were waiting for pipeline connections or to be fracked. A lot of those wells have been fracked over the last six months and the inventory continues to go down. I believe that inventory will be depleted by Q1/14, and given the drilling activity, the very high decline rates of the wells and the number of rigs running in the Marcellus, further growth is not supported. The Marcellus is still a very significant field, the biggest in the United States. When it peaks out it will probably plateau for a while, depending on activity levels, but it still will not be able to make up for falling production in nearly every other region in the United States. When this happens, we will see price spikes more frequently.
A really good example of the damage high prices can cause outside of the Northeast is Mexico. In August 2012, landed LNG prices in Mexico were $3.17/MMBtu. In August 2013, Mexico h
The Energy Report: Bill, you published a book six months ago, "Cold, Hungry and in the Dark: Exploding the Natural Gas Supply Myth," questioning the conventional wisdom of shale gas. Have events supported your thesis?
Bill Powers: Yes, absolutely. Several of the predictions I made in the book have come true since the book hit the shelves in July. First, we've seen numerous shale plays head into decline. We've seen big declines from the Haynesville as well as the Barnett. The Fayetteville is in decline; there have been further declines in the Gulf of Mexico and Wyoming. But what has really changed is the North American natural gas market has become extremely unbalanced, which was what I had predicted would come to pass sometime in the 2013–2015 timeframe. The cold weather over the last six weeks has accelerated what I have been talking about in the book.
TER: How so?
BP: I predicted that gas prices would lead to layoffs and industry supply disruptions, and that's already occurred. We've seen paper mills in New Hampshire lay people off because natural gas prices in New England were north of $50/million Btu ($50/MMBtu) for a period and remain very high. We've also seen incredibly high prices in New York, and this is a time of record production coming out of the Marcellus. These are really the first examples of the violent price spikes and industrial shutdowns we will see in other parts of the country.
Across the U.S. over the next several years, I predict we will see spikes of very high prices, which will fall back to higher levels than they previously reached. Then, as the next weather event comes, prices will spike to new highs. That has already happened in New England and other areas of the Northeast in part because those areas are supply-constrained due to limited pipeline availability, but also because of increased demand.
If the bond debt were restructured to a convertible instrument with delayed interest payments, then JRCC would be able to weather the downturn especially considering that natural gas prices have risen dramatically in 2014 and profitability could happen sooner than everyone expects as gas and coal prices rise together.
While we can speculate about how the restructuring will be done, there is a a process happening now and we should hear about a plan probably in the next 30 days.
d. on or before March 7, 2014, the Company must complete the preparation of a data room containing Company financial and operational information and make the data room available to Prospective Transaction Parties that have executed a customary confidentiality agreement;
e. on a weekly basis from and after March 10, 2014, the Company must provide the Lenders with a status report of its effort Less
OCLR needs to reduce headcount down to 1,500 by July 1, 2014 which is the key step to downsize the company for profitability in 2014.
At this stage, then a buyout offer is possible although achieving profitability by the end of 2014 is really the goal to boost stockholder value.
High density means that OCLR should have excellent margins on this new module since the customer will be able to use fewer slots in their chassis' and will pay a premium for the module.
SAN JOSE, Calif., March 3, 2014 /PRNewswire/ -- Oclaro, Inc. (OCLR), a leading provider and innovator of optical communications solutions, today announced that it will be demonstrating a much-anticipated coherent CFP2 pluggable transceiver module at OFC 2014. Oclaro continues to focus on creating highly differentiated products based on its core competencies in laser innovation, photonic integration and advanced packaging expertise. The module's compact, coherent pluggable form factor with a power dissipation of only 12 Watts delivers significant benefits to Oclaro customers with new levels of performance and flexibility for optical networks operating at 100G and beyond.
"The availability of coherent CFP2 pluggable modules is going to drive a significant increase in the number of 100G and 200G coherent ports we expect to see in 2015," said Daryl Inniss, VP and Practice Leader of Components for Ovum. "The market has been demanding the higher densities, lower power and smaller form factors that are possible with CFP2 coherent technology and Oclaro has positioned itself well, as the first company to bring this technology to market."
I think that part of the negotiation happening soon will be a debt for equity swap with the bondholders taking a 50%+haircut on the bonds for some convertible debt.
Chapter 11 is a last resort since the value of the assets in a fire sale will be even less.
Ultra Petroleum saw quite a reversal of fortune in 2013 thanks to surging natural gas prices. Its drilling program, along with the 33% price increase in natural gas from $2.63 per million cubic feet to $3.51 per Mcf, enabled Ultra to increase its proved reserves from 3.1 trillion cubic feet to 3.6 trillion cubic feet. That also boosted its PV-10 value by 83% to $4.1 billion. That's a huge increase in value for the company, but it's just the tip of the iceberg.
Ultra knows it is sitting on a whole lot more gas than just its proved reserves at last year's prices. The company ran two scenarios in which it tested the sensitivity of its reserves based on a natural gas price of $4.50 per Mcf.The company's current investment scenario puts its PV-10 value at $5.7 billion. However, at that price Ultra can afford to increase its investments to grow natural gas production. Under an increased investment scenario, the company's PV-10 value jumps to $8.5 billion.
Those numbers, though, still don't tell the whole story. Ultra sees as much as 19.3 trillion cubic feet of resource potential within its current portfolio of opportunities if gas prices keep moving higher. For example, at a natural gas price of $5 per Mcf it is looking at $16.6 billion in value. For a company with a current enterprise value of $6.2 billion, that's a compelling upside potential.
"The most notable trend in the longer term was that the forecast for the 5-15 day time frame cooled markedly over the last 24 hours. The models continue to advertise that the arctic air will come in two waves, the first of which will impacting the nation over the next three days. After some moderation over the weekend, a second reinforcing shot will arrive behind a large storm system that will impact the eastern two-thirds of the nation next week. As a result, the forecast projection for the week of March 1-7 declined 25 BCF over the last 12 hours to a -173 BCF draw, 78 BCF below the five-year mean withdrawal and 28 BCF shy of last year’s 201 BCF draw. This is the largest projection for the storage week since I began issuing projections for the week of March 1-7. The following week of March 8-14 also increased by 18 BCF to a projected -104 BCF withdrawal as below-average temperatures look to persist across the eastern half of the nation. For the five-week period, my model is projecting that 523 BCF will be withdrawn from storage between February 15 and March 21. If this forecast verifies, natural gas storage will bottom out at 889 BCF the week ending March 14, the lowest since the week of February 28, 2003. Natural gas finished that season with just 654 BCF in storage.
The consensus explanation offered for the steep freefall over the past two days has been options expiration profit taking and the threat of a warm-up sometime in mid-March. The first I understand—natural gas rallied 17% last week and was up over 25% year-to-date—however, given the error associated with forecasts beyond seven days, I am somewhat at a loss to explain investors’ skittishness over milder temperatures. Natural gas stores are nearly 1000 BCF below year-ago levels and over 700 BCF below the five-year average. "
The answer to a public record of deliverables appears to be that there is no public disclosure of the milestones, but the stock move last Friday is an indication that news leaks out about the disclosures.
Google has been buying dark fiber worldwide for years with a mystery agenda about their plans.
Now they are announcing a service initially in the US providing internet services.
This will be competition with the traditional carriers.
The cost will be massive and substantial optical equipment will be needed.
From an OCLR perspective the demand for optical components will increase as Google builds out this network.
While many small coal fired plants have been retired with more to come, they only amount to about 15% of the total MW capacity for the US closed by 2015.
Considering that the current US coal fired electrical capacity is only operating at about 50%, there is plenty of spare capacity for more coal fired electrical generation.
The big issue has been the competition from natural gas.
The natural gas price spike in 2014 is not a one time event caused by the weather. The economics of drilling for natural gas are bad with the average all in cost of about $6 mmBTU. Until the oil and gas companies see sustained prices at their breakeven, they are not going to drill more dry gas wells especially with the big profits to be made drilling for oil.
Last week Ultra Petroleum (UPL) reported and there was a long discussion of these issues in their quarterly conference call. Keep in mind that UPL has substantial Marcellus properties and is one of the lowest cost natural gas producers. The CEO discussed their new push into oil drilling with many questions about why he is not planning to drill more Marcellus gas wells. His reply was that there is not a sustained pattern of higher gas prices and the return on investment in oil drilling is much better. While the major oil and gas producer have had this plan for a long time, UPL was one of the last holdouts for natural gas and even they have thrown in the towel on the natural gas business.
At $6 mmBTU even the high cost coal producers such as JRCC can be profitable as the low priced competition from natural gas disappears.
It is interesting about the timing of this move on the same day as the date for the bids from interested parties.
The hedge fund boys have inside information on the JRCC situation so the short game is up for them and they are closing their shorts and moving on..
"While money seems to be no object for Google—it can easily tap the debt capital markets to leverage its envied balance sheet and market cap—the cost of a full nationwide rollout of Google Fiber could well hit $140 billion, according to Goldman Sachs (GS) estimates. "
The common wisdom that natural gas prices will drop quickly this summer is not lost on the oil and gas producers who are hedging their existing gas production, but are not planning on new dry gas drilling budgets.
Instead they are sinking almost all their money into oil and liquids where there is a high return on investment and a global market.
If natural gas is above $6 for the rest of 2014, then in the 2015 budgets there will be more dry gas drilling planned.
The economics of natural gas have been bad for so long that there will not be a rush back into dry gas drilling until there is solid evidence that this spike in prices will last.
The pipeline companies are in the same boat and investing in new oil not gas pipelines.
If you want to see confirmation of this trend read yesterday's conference call notes from Ultra Petroleum (UPL) who are moving quickly out of gas and into oil.