For Immediate Release
Chicago, IL – May 30, 2012 – Today, Zacks Equity Research discusses the U.S. Oil & Gas, including Ultra Petroleum Corp. (UPL), Talisman Energy Inc. (TLM) Encana Corp. (ECA), Chesapeake Energy Corp. (CHK) and ConocoPhillips (COP).
A synopsis of today’s Industry Outlook is presented below. The full article can be read at http://www.zacks.com/stock/news/76003/oil-gas-stock-outlook-may-2012
Over the last few years, a quiet revolution has been reshaping the energy business in the U.S. Known as ‘shale gas’ -- natural gas trapped within dense sedimentary rock formations or shale formations -- it is being seen as a game-changer, set to usher in an era of energy independence for the country. The success of this unconventional fuel source has transformed domestic energy supply, with a potentially inexpensive and abundant new source of fuel for the world’s largest energy consumer.
With the advent of hydraulic fracturing (or fracking) -- a method used to extract natural gas by blasting underground rock formations with a mixture of water, sand and chemicals -- shale gas production is now booming in the U.S. Coupled with sophisticated horizontal drilling equipment that can drill and extract gas from shale formations, the new technology is being hailed as a breakthrough in U.S. energy supplies, playing a key role in boosting domestic natural gas reserves.
As a result, once faced with a looming deficit, natural gas is now available in abundance. In fact, gas stocks -- currently some 40% above the benchmark five-year average levels -- are at their highest level for this time of the year, reflecting low demand amid robust onshore output.
Due to this huge natural gas surplus, inventories in underground storage started to climb since March – weeks earlier than the usual summer stock-building season of April through October. They have persistently exceeded the five-year average since late September last year and are likely to test the nation’s underground storage facilities by fall. In fact, the EIA foresees natural gas storage at record highs of 4.10 trillion cubic feet by October.
Natural gas prices have dropped approximately 49% from 2011 peak of $4.92 per million Btu (MMBtu) in June to the current level of around $2.50 (referring to spot prices at Henry Hub, the benchmark supply point in Louisiana). Incidentally, prices hit a 10-year low of $1.82 during late April.
To make matters worse, near-record mild weather across most of the country curbed natural gas demand for heating all winter, leading to an early beginning for the stock-building season. The grossly oversupplied market continues to pressure commodity prices in the backdrop of sustained strong production.
This has forced several natural gas players to announce drilling/volume curtailments. Exploration and production firms like Ultra Petroleum Corp. (UPL), Talisman Energy Inc. (TLM) and Encana Corp. (ECA) have all reduced their 2012 capital budget to minimize investments in development drilling.
On the other hand, Oklahoma-based Chesapeake Energy Corp. (CHK) and rival explorer ConocoPhillips (COP) have opted for production shut-ins to cope with the weak environment for natural gas that is likely to prevail during the year.
However, we feel these planned reductions will not be enough to balance out the massive natural gas supply/demand disparity, and therefore we do not expect much upside in gas prices in the near term. In other words, there appears no reason to believe that the supply overhang will subside and natural gas will be out of the dumps in 2012.
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