Must-know natural gas production trends to watch for in 2014
Recent natural gas demand trends
Natural gas is a clean-burning energy fuel used for heating, cooking, and electricity generation. In the U.S., it’s primarily used as a source for electricity generation, and it competes with coal, which is also another major source of electricity generation.
A lot of gas was used over this winter heating season, which caused prices to spike and inventories to decrease. The U.S. Energy Information Administration (the EIA) stated that the total consumption of natural gas in 2013 was 71.4 billion cubic feet per day (Bcf/d), a 2% increase over 2012, and natural gas in storage as of March 2014 was 826 Bcf.
Large withdrawals led to high natural gas spot prices, which have remained volatile in the last few months. The EIA expects that the Henry Hub natural gas spot price, which averaged $3.73 per MMBtu in 2013, will average $4.44 per MMBtu in 2014. Because of higher natural gas prices, the power generation sector anticipates less demand this year, as coal prices are cheaper relative to natural gas prices this year compared to prior two years, causing power producers to switch to coal. To read more about this, see the Market Realist series Why coal producers like Arch Coal will benefit in the near term.
However, U.S. natural gas demand is still expected to continue to grow, given industrial, residential, and commercial demand, which would offset the declines from the electric power sector. The EIA expects total natural gas consumption will average 72.1 Bcf/d in 2014, an increase of 0.7 Bcf/d from 2013.
Higher U.S. demand is a positive for natural gas prices. This is positive for upstream names such as Chesapeake Energy (CHK), Southwestern Energy (SWN), and Range Resources (RRC), which are all part of the SPDR S&P Oil & Gas Exploration & Production ETF (XOP). Investors can also gain natural gas exposure through the U.S. Natural Gas Fund (UNG). To learn more about different ways to invest in natural gas, please read Market Realist’s Popular ways for investors to play natural gas prices.
Natural gas supply
Despite the lower natural gas prices, natural gas production growth has remained steady over the past few years. According to the EIA, in 2013, total U.S. natural gas production increased by 1%. This was the smallest increase since the shale gas revolution began. The increase was mostly from the ultra-prolific and low-cost Marcellus shale, which has added about 4 Bcf/d in new production year-on-year. The Marcellus spans across Appalachia, with the most prolific areas in Southwest and Northeast Pennsylvania, and it has been one of the largest sources of U.S. natural gas production growth over the past few years.
The EIA expects natural gas–marketed production will grow by an average rate of 3.0% in 2014 and 1.5% in 2015. Rapid natural gas production growth is expected in the Marcellus in 2014. Analysts project that within the next year, the Marcellus will provide at least one-fourth of the nation’s supply of natural gas.
Recent upstream technologies, such as hydraulic fracturing and horizontal drilling (which are used to develop areas that were previously uneconomic to drill) will continue to contribute to the increasing production. ICF International estimates that the U.S. has a recoverable gas resource base of over 3,500 trillion cubic feet (tcf). This represents approximately 150 years of U.S. gas demand at current levels.
Midstream companies are affected by natural gas
Companies involved in the natural gas gathering and processing space are often midstream energy MLP companies (“midstream” generally refers to the transportation, storage, and marketing of hydrocarbons such as natural gas and oil).
Companies that will benefit from this continued increase in supply include midstream service providers in the right area. MarkWest Energy (MWE) and Williams Partners (WPZ) are major providers of gathering and processing in the Marcellus. Regency Partners (RGP) has major gathering and processing operations in the Eagle Ford. Exterran Partners (EXLP), which provides compression services, also stands to gain from increased natural gas production in the U.S. Many of these names are components of the Alerian MLP ETF (AMLP), the largest ETF with a focus on the energy MLP sector.
To learn more about major MLPs in the business of natural gas gathering and processing, read the Market Realist series Natural gas gathering and processing: A major business for many MLPs.
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