Buddy0807

Here's a summary of fairly interesting thoughts from a panel discussion on natural gas from a recent industry conference: Upside to Current Strip: The panelists believed there is limited upside to the forward strip through YE’13 but potential upside in ’14. This is driven by an uptick in power generation demand in ’14 due to the construction of new gas power plants combined with a likely rolling over in gas production. They were not surprised that gas production had not rolled over yet since there is a long lead time on pad drilling (6-9 months from initial drill dates to production and ultimately production decline) combined with associated gas growth and producers that are drilling their best dry gas wells to ensure economic returns. Gas Market Becomes Balanced at $4: The panelists believe the gas market reaches balance at $4/Mcf. When 12 month strip prices cross below this threshold, then producers reduce activity (witnessed during the fall of 2011). At $5/Mcf, one panelist believed that conventional supply would come into the market. As such, $5/Mcf is likely too high a price. $5 Gas with a $3 Supply Cost is Equivalent to $100 Oil with a $60 Supply Cost: Regarding the question of what gas price is necessary to redirect capital away from oil/liquids plays, one panelist stated that $5 gas with a $3 supply cost is equivalent to $100 oil with a $60 supply cost. Therefore, at $5 it appears quite a bit of drilling activity will begin and significant gas supply can be unleashed. Bullish on Demand: The panelists were uniform in their enthusiasm for long term gas demand, specifically power generation driven by the construction of new gas plants combined with the future de-emphasis on coal-fired generation. Regarding liquefaction, one panelist stated that they were not as optimistic given that politicians would prefer that the gas stayed domestic and at reduced prices to increase industrial employment. Moreover, any argument regarding exporting gas would likely include an argument on the export of crude oil which would politically complicate the discussion and make securing export permits difficult. The panelists were optimistic about long term industrial and transportation fuel demand—it will just take time to achieve robust gains in gas demand in these areas. Horizontal Gas Rig Count Should Move Lower: One panelist expects the horizontal gas-directed rig count to decline by another 30-40 rigs and then flatten out. The horizontal rig count declines will primarily be in the Granite Wash and the Eagle Ford. This panelist expected the Barnett, Fayetteville and Haynesville rig count to flatten out from here and for the Marcellus rig count to have a slight upward bias next year. New Liquids Plays Will Take Time: The panelists are pursuing a number of new liquids plays and we specifically asked about the Tuscaloosa Marine Shale, Brown Dense, DJ and Montana Bakken plays. For the TMS, the challenge remains to reduce well costs. For the Brown Dense, one panelist stated that they are on the cusp of determining whether the play works or does not. For the DJ and Montana Bakken, it is still early days and time will tell. Lower Service Costs Ahead: Both panelists expected lower service costs ahead in FY’13 (~10% lower across the board, fulcrum of the decline driven by frac). The panelists expected E&P’s to have the upper hand on service costs for the next 2-3 quarters. For FY’12, costs were expected to be down 12% in the Fayetteville and down 10% in the Marcellus. Supply-Demand Works: One panelist reminded the audience that nothing cures low prices like low prices. After having nearly 900 bcf of surplus gas in storage at the end of March ’12 relative to last year , this surplus has been cut in half and should fall further as lower gas prices stimulated much better than expected power generation demand. Longer Term the Oil-Gas Spread Should Narrow: Gas has too many benefits (cleaner burning, cheaper than coal and oil), as such the extreme spread between oil and natural gas should be reduced over time. While the current spread of 35 to 1 is too high, 6 to 1 is likely not feasible either. The panelists believed the right answer would be somewhere around 15 to 1.

Sorry for the blanket statements... Nope, not confusing exploration with development. The lines are fairly blury onshore. Just pointing out that onshore "exploration" is a substantially different process than offshore. With onshore, you're just basically taking core samples and designing the appropriate fracturing cocktail. I'm obviously being general... Of course they care about the gas price. To your point, there has been and still is acreage held by production (HBP) and therefore must be drilled to be retained. But HBP drilling should be complete soon. I've heard YE 2013 being thrown around. Who knows for sure. But the pig has moved pretty far through the python. That'll clearly be a benefit gas price wise for those rigs force drilling dry gas wells, well assuming they stop... On your marginal cost comment, I'm personally not so sure. Reasonable minds can disagree. Two thoughts. The first is associated gas. I've heard recent estimates suggesting that onshore gas production can still grow at ~5% per year without drilling ANY gas wells. And it's all because of associated gas produced from onshore oil drilling. Second, low cost basins are driving the gas production growth. The Marcellus (the gas portion) is meaningfully economic at $3.50/mcf. The Eagle Ford dry gas makes around 10% IRRs in the ~$3s/mcf. Service cost reductions have clearly helped with this but so have efficiency gains which are here to stay. One thing that's counter intuitively good for gas prices is there's very little incentive for producers to move their rigs back from onshore oil plays (well, assuming oil prices stay high). The IRRs are so huge in onshore oil plays, much better than wet gas basins. So it will take a serious rebound in gas prices to incent producers to reallocate rigs to dry gas basins (all things being equal and assuming sustained oil prices, lots of ifs). Sure, I agree that it's plausible that gas prices have hit a bottom. I'm just saying that the upside to downside ratio might not be huge and possibly 1x1 as a result of several forces keeping a lid or ceiling on prices. Basically, range bound. I agree that the low cost producers are the way to go if you want to play this thesis long-term. I also personally like some of the more levered (as in financially levered) gas producer equities, sort of looking at them like options.

The term "exploratory" as it relates to NAM shale gas is kind of confusing to me. Nowadays, the extraction process is more like manufacturing. You stick a horizontal drill in the ground (like anywhere these days) and boom you've got shale gas. I tend to think of it like a faucet that producers can turn on and off with relative ease. So while gas prices may indeed be close to a floor (or have already reached it earlier this year), I'm not sure it's as asymmetrically unballanced to the upside as many tend to think. Basically, bc of the ease with which producers can ramp up production quickly if gas prices rebound, there also may a ceiling to prices.