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Why I am a Gas bull


yadayada
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So gas E&P stocks have dropped by a huge amount. Thought I would provide some analysis with actual numbers why it is exciting to invest there now, what the market looks like.

 

To start off, since 2010, gas production has increased by about 500 billion CF a month.

http://www.eia.gov/dnav/ng/hist/n9050us2m.htm

 

And the Marcellus field has added in that period about 420 billion CF a month. This is all average production per day.  And they are now levelling off. So Marcellus is a huge % in this. Some other traditional fields have been in decline. See following link to verify this:

http://www.eia.gov/petroleum/drilling/pdf/dpr-full.pdf

 

I googled for a bit on the Marcellus field a bit and found the following articles:

https://oilandgas-investments.com/2015/natural-gas/the-marcellus-is-close-to-peak-production-and-why-this-is-so-important/

http://www.naturalgasintel.com/articles/99892-as-marcellus-shale-costs-fall-and-volumes-rise-operators-want-more

 

So Cabot oil has some of the highest quality assets in Marcellus, and they are break even full cycle at about 1.4$ realized prices (currently closer to 1$):

http://www.naturalgasintel.com/data/data_products/weekly?location_id=NEATENN4MAR&region_id=northeast

http://phx.corporate-ir.net/phoenix.zhtml?c=116492&p=irol-calendar (presentation of Cabot oil).

 

What would other gas producers look like? Note that operating costs have not fallen by much, and they are 2/3 of production costs.

 

So for the lowest cost player in this field to make money you need at least gas prices of about 3-3.5$ elsewhere (. My guess is , a lot of marginal players need at least 4$ gas to make a full cycle profit. You can see this in the total collapse in rigs as soon as gas prices dropped in a lot of regions.

 

So if the field that basically provided all the growth in NA gas levelled off the moment gas reached 3$ end 2014, and Utica also levelled off the moment gas prices fell (with rig count falling from 30 to 5 very quickly), then it is clear to me that with other fields declining or even, total production will decline. You can actually see this so far in 2015 (you can google that link for yourself). If you check the above link, you will see that the other fields have declined by about 2 Bcf/ day in 2015.

 

With demand to grow and Cheniere having export capacity of 4 Bcf/d, of which 2.8 Bcf/d coming online in 2016 and 2017 (that is over 17% of marcellus field). So production is down in the US, up 1bcf/day in Canada I think (judging by exports) and possibly another bcf/d will fall off at these prices if declines continue, and 2.8bcf/day will be added in export demand. Then there is a steady rise in gas consumption in north america that increased 2.5% in 2014 (or about 2 Bcf/day total, so not 2bcf added each day).

 

So if consumption rises another 4bcf/day in next 2 years, exports increase 2.8bcf/d, that is 6.8bcf/d. And so far production is actually falling. So at 16 bCF/day right now (possibly lower already), the Marcellus field has provided almost all the growth in US gas. They stopped growing right away when gas hit 3$. And to keep up with demand you will need 6.8 million CF/day coming online in the next 2 years. That is half of the Marcellus field! And the only two fields that were growing rapidly, and have provided almost all of US gas production growth levelled off right away when gas started falling (unlike oil for example). If you add in some additional LNG terminals down the line here, I think the future for gas producers look very bright.

 

FWIW total north american consumption of gas was about 91 bcf/d in 2014. This includes mexico. And Canada production has been flat in the past 7 years, while their reserves are dwindling (US reserves growing). So together will LNG exports from Cheniere and regular growth, that is a 7.4% increase in demand in the next 2 years alone. And it doesnt really look like production is catching up with that right now.

 

http://www.bp.com/content/dam/bp/pdf/Energy-economics/statistical-review-2015/bp-statistical-review-of-world-energy-2015-full-report.pdf

 

Page 22 and 23. Note that you ahve to convert to cubic feet, the unit I used. So multiply by 35, and divided by 365 to get BCF/day.

 

So with that in mind, if you bet on cheap gas producers that make a small profit at around 3$ gas you will do very well. Especially since some of those are priced like they will never make money again. And the F&D costs are actually pretty low right now, they don't have that much room to fall % wise vs total full cycle development costs.

 

Finally time to drill has been cut by 60-75% in the past 6-7 years. But rig count has actually fallen from 1400 to 200 now! With gas consumption up quite a bit. Even if they are more efficient, that is just too few rigs.

 

A few names I had in mind are Bellatrix, perpetual, Tourmaline, Chesapeake, Trilogy. All of these have fallen a lot, will likely survive the next 2 years, and are very very cheap if gas goes to 4$+ .

 

Thoughts?

 

edit: here some more on Cheniere: http://marketrealist.com/2014/10/must-know-overview-cheniere-energy/

 

So potentially more then 5bcf. Add in 4bcf production growth in next 2 years, and that is 9bcf in demand growth. Which would be huge.

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Without discussing the link between oil and the US dollar, any rational is short sighted.  I searched the OP post for hte word dollar and found nothing so I didn't read it.  Maybe later.

 

Simple: Strong US dollar => in the US it's cheaper to import gas than to pump it from underground.

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Oil is irrelevant here. And currency moves account for about 20% in costs. But most of US gas is consumed by US. And the supply/demand gap will simply be way too big. That is the thing that really matters here. The fact that the only fields that can provide production growth, stopped growing, the moment gas went below 4$. So you need almost 7bcf/d in extra production in 2 years time vs 91bcf/day now, but actual growth in the US will be closer to zero if prices stay here. So that means there is an extremely large chance prices will correct by a large % within 1-2 years. Because at some point production will have to increase, and that only happens at higher prices.

 

So that means betting on the more levered gas plays that have fallen a lot becomes a less risky proposition.

 

Also Canada produced a total of 15.5 bcf per day in 2014. Exports were 7.7bcf/day. Consumption was 10bcf/day. So in order to fill this 7bcf/day gap in the US they would need to increase production by almost 50% within 2 years. And then double their export output. Highly unlikely that will happen.

 

edit: Also 25-50 GW of coal will come offline. it takes 10 cf of gas to provide 1 KWH of energy in a gas plant. so you would need another 10 * 24 * 25 million . That is 6-12bcf/day in demand growth alone.

 

http://www.eia.gov/tools/faqs/faq.cfm?id=667&t=2

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This summarizes my preference of gas over oil.  I would add some of the low cost Marcellus players like Antero, Southwestern and Cabot.  Southwestern is the cheapest of the group.

 

Packer

 

How would you rate Ultra's asset swap in 2014, positive or negative?

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The Marcellus region is notorious for lack of takeaway capacity.  The $1 price that you quoted is for spot price that doesn't have committed pipeline capacity.  In reality, producers with dedicated capacity can realize much higher price.  There is also no shortage of companies building pipeline capacity to takeway production including EQT and Columbia Pipeline Group.  The addition of new pipelines may encourage producers to drill more which may lead to additional production which may dampen prices.  Any thoughts on this?

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Here are some actual production forecasts using EIA data...

 

Natural gas productions at current rig counts and assuming same productivity increases over the past year in the Marcellus and Utica should decrease by about 10% just from shale.

 

Range Resources estimate 2016 demand to clock in at 3bcf/d. Current oversupply is 2bcf/d. A decrease of 4bcf/d + 3bcf/d - 2bcf/d gives us an undersupply of 5bcf/d.

 

Email me if you want to EIA data spreadsheet. I also calculated oil productions too. Hint: oil will be undersupplied given current trajectories going towards the end of 2016 given both Iran coming online and OPEC using the remainder of the 1.6 mil bbl/d in capacity.

 

Enjoy boys... Took me a while to calculate these.

Screen_Shot_2015-08-28_at_2_02.19_PM.thumb.png.3131044abf2363ba0fa8b538b94dc3c3.png

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thanks Wilson, does that 3bcf/day include LNG exports? Currently at least 10bcf/d is under construction that is suposed to come online in the next 6 years. Add 3bcf/d in demand growth from industrial and coal plant shut downs, that is an extra 28bcf/day needed in 2021. Then factor in supply reductions and I easily see how another 30bcf/d need to be added by Utica and Marcellus. They would need to almost tripple in production. About 17bcf of pipeline capacity is planned over the next 3-4 years.

 

With a lot of debt heavy balance sheets, I dont see how taht is sustainable below 4$?

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I don't really disagree with what you are saying here. My question is this: if we indeed get a shortage and prices go up to 6 or 7 what prevents these guys to take the rigs back out, do the whole drill baby drill thing,  bump up supply and crash prices again?

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I followed the link's below and got different results than the article suggests.  Perhaps I'm missing something...

 

https://gyazo.com/217b85f4dd25ac5e8d4ad8bd503a2dcf

 

http://www.rrc.state.tx.us/oil-gas/research-and-statistics/production-data/texas-monthly-oil-gas-production/

 

The thesis rests on declining production here when the link & data I'm seeing suggests the opposite..  My assumption is I'm being directed to the wrong place or have some other error because it seems like a lot of work to have this wrong..

 

https://oilandgas-investments.com/2015/natural-gas/the-marcellus-is-close-to-peak-production-and-why-this-is-so-important/

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thanks Wilson, does that 3bcf/day include LNG exports? Currently at least 10bcf/d is under construction that is suposed to come online in the next 6 years. Add 3bcf/d in demand growth from industrial and coal plant shut downs, that is an extra 28bcf/day needed in 2021. Then factor in supply reductions and I easily see how another 30bcf/d need to be added by Utica and Marcellus. They would need to almost tripple in production. About 17bcf of pipeline capacity is planned over the next 3-4 years.

 

With a lot of debt heavy balance sheets, I dont see how taht is sustainable below 4$?

 

Yeah it includes LNG.

 

I think you are overestimating demand as a lot of the LNG export terminals aren't even under construction yet.

 

The key is the Marcellus. Just pay attention to that, because the Bakken, Eagle Ford, and Permian are seeing a decrease in associated gas production.

 

Also remember, natural gas will almost certainly never go above 4.5 for any sustainable period of time as drillers like EOG and PXD are sitting on massive amounts of gas deposits in the Permian and can bring them online at any time.

 

EOG has said though, they won't even consider natural gas drilling until natural gas prices recover to AT LEAST 4.5. I tend to think when companies say at least, they will likely start at that price.

 

Am I a bull on natural gas? Yes, definitely as it's mainly dominated by local supply/demand as opposed to global forces. But I'm not bullish to the point where I will estimate above $4.5 nat gas as I think there are lots of supply that can be brought online in less than 6-9 months.

 

I think a fair value for natural gas giving current supply/demand is around $3.5 spot/mcf. Hence, why I used 3.5 as my pricing for my BXE write up.

 

 

 

Screen_Shot_2015-08-30_at_8_25.18_AM.thumb.png.8a122a1957dde03b1e4ff98e375bc844.png

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In various write ups and in Cheniere's investor presentation it states that about 2.6-2.8bcf/day will come online in 2016 and 2017. And between now and 2020, you can possibly expect 10+bcf/day in Canada and the US.

 

Hoping for a demand shock with a sharp price increase on the short term. Even if average prices are 4.5$ for a year, you will do very well.

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I don't really disagree with what you are saying here. My question is this: if we indeed get a shortage and prices go up to 6 or 7 what prevents these guys to take the rigs back out, do the whole drill baby drill thing,  bump up supply and crash prices again?

 

That is the nature of the cyclical beast, prices go up and the rigs start working again.  With that said, I don't forsee $6 or $7 natural gas in the next few years.    When thinking about the supply of natural gas, there are three sources to consider: (1) Wells that are completed, connected, and supplying gas; (2) Wells that are completed but unconnected; (3) Uncompleted wells (i.e. potential drilling sites). 

 

From skimming through 10Q's, there appear to be a fair number of completed wells that have not been connected yet to local/adjacent gathering systems.  This seems to be an intentional phenomenon.  As the price of natural gas creeps up, these will be connected fairly quickly and we will see another deluge of natural gas hitting the system. 

 

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So what about Ethlyene and LPGs? Niche market. Exports going to boom. Takes technical knowhow and disciplined capital allocation. I have an idea, NVGS.

 

If I had to pick a play on ethylene and LPG's, I think I would pick Enterprise Product Partners (EPD).  Premier midstream assets in the Gulf Region for moving natural gas liquids, ethane, propylene, etc.  Also has premier waterfront assets for loading ships with ethane, LPG's, etc, along with dockspace for storage.  For most folks on this board, I suspect EPD is probably not sexy enough or undervalued enough.  With that said, if I have to play oil/gas, I generally play midstream and I go with the folks who are probably the most respected, and most shareholder friendly, midstream operators in the United States.  The Energy Transfer family (ETE, ETP, SUN, SXL), , or the Williams Family (WMB/WPZ) would also be decent choices if trying to play natural gas and natural gas liquids.  WMB/WPZ probably more focused on natural gas than Energy Transfer and Enterprise Product Partners.     

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So what about Ethlyene and LPGs? Niche market. Exports going to boom. Takes technical knowhow and disciplined capital allocation. I have an idea, NVGS.

 

You can see my thoughts in the NVGS thread but I like it a lot. I thought it was really cheap when I bought it earlier this year, now it's becoming stupidly cheap. Since then all they've done is release great results and had nothing but good things to say about the future. Might take a couple years to play out but I think LPGs/ethane (goes without saying I like natural gas as well) is going to be a great place to park some money in until then.

 

Good write up yadayada.

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Drillers Unleash ‘Super-Size’ Natural Gas Output

Applying newer fracking methods to existing field offers potential for more and cheaper fuel

 

The U.S. may have far more natural gas than anyone imagined, all reachable at a profit even with today’s bargain-basement prices.

 

Experimental wells in Louisiana by explorers including Comstock Resources Inc. and Chesapeake Energy Inc. are proving highly lucrative thanks to modern drilling techniques and the sheer volume of fossil fuels that can be coaxed out of the ground.

 

http://www.wsj.com/articles/drillers-get-super-size-natural-gas-output-1441127955

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agree with the comment that marcellus is the primary factor.

 

looking at eqt, range, cabot, antero, consol and southwestern production forecasts for 2015, they average 24% increase. consol expects further 30% increase in 2016. this is following the period of 2010-2014, when the average of the group achieved was 28%, 40%, 45%, and 48% for 2014, 2013, 2012, 2011. And production universally exceeded initial guidance.

 

yadayada, you say marcellus is going to stop growing. why do you believe that?

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  • 2 weeks later...

Is any data available on break even points (based on gas prices) at various production geographies (Marcellus,Eagle ford,Spirit River etc) ?

 

Is any data available on drilled but not connected wells?How big of a factor could this be ?With more distribution capacity couldnt one expect more supply in hitherto unconnected places but with good economics?

 

Given all the innovation/effeciencies in the space to make drilling worthwhile at prices du jour, it seems like the classic standing on toes to view the street parade (that Warren Buffet often talks about). Everyone seems to figure out how to make 10-15 percent on well cost only to have prices drop.

 

The production drop in the Marcellus is obviously a big part of the bull case,is it fair to assume anyone with a lower cost of production than Marcellus will eventually to be uneconomical?

 

-cmakam

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I took a quick look at Cabot.  #'s according to Morningstar.

 

ROE average between 2009 and 2014:  7.3%

 

Sales up 2.5x from 09- 2014.

 

I find it totally irrational that mgmt has expanded this much with bad ROE's. 

Why did they expand with such a bad ROE?

 

Using $5.19 in book (no intangibles that I see) the stock is at 4.3x book. 

 

That a is extremely high price to pay.  I would pay significantly less than tangible book.

 

 

 

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  • 3 months later...

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