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A Natural Gas Disconnect


Parsad
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The current natural gas situation does present a thought provoking conundrum.  On the one hand, gas supplies have exceeded even the most optimistic views of only a year ago form most experts.  And on the other, per our guests at our pre-dinner last year suggested all-in prices should be in the neighborhood of $5-$6 range.  As such, you have seen some production reduced, but not all as the Globe article identified.

 

The US and Canada are a captured market as we can not get the gas out.  In Japan, natural gas prices are near $18.  LNG tankers??

 

Cheers

JEast

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just finished reading Avner Mandleman's  book on sleuthing stocks. He suggested that a good way to look for possible bottom in resource industry is to look at the capex of all the producers. Turn in price of commodity/industry to occur when capex decreases to less than depreciation charges.

 

I dont know whats happening in nat gas market but it may be instructive to have a look.

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Anyone knows how long it takes to build a LNG terminal and if any are currently approved/in construction in North-America?

 

In BC:

http://www.theglobeandmail.com/globe-investor/bcs-kitimat-lng-terminal-wins-export-licence/article2200412/

 

The licence allows Kitimat LNG to export up to 10 million tonnes a year of liquefied natural gas. That’s equivalent to the output of two development stages at the terminal; the first is expected to enter service 2015, the second in 2017 or 2018.

 

So probably not until 2016+ for the first phase.

 

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I have been saying this for 3 years and have been right thus far. Nat gas will continue to suck wind. Just wait till everyone even the early value guys hate it. I still dont see any increased significant uses for gas, and still dont see restraint on the drilling side. All that wet gas, and liquids / oil still has plenty of natural gas. The miss lime play that SD is drilling is 50% nat gas...

 

You also have the ultra deep wells drilled in the gulf...

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Myth, There is new regulation(Can't remember its name, read about it on morningstar) in the electricity market that will make the majority of coal operated plants uneconomical, and I can't see them switching to anything but gas.

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Myth, There is new regulation(Can't remember its name, read about it on morningstar) in the electricity market that will make the majority of coal operated plants uneconomical, and I can't see them switching to anything but gas.

 

Mercury and Air Toxic Standards or MATS.

 

According to EXC conference call.  Got the info from Longleaf shareholder call that just went public.

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The real question is when does it kick in. Is it 3-4 years away effective date wise. I think things will turn, just not anytime soon. Also I dont see $9, I see $4 or $5. Just too much gas to drill, too many rigs, and too many leases which need to be HBP.

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Guest Hester

Do any of you guys know of a single producer that can make money, much less a reasonable after tax return given the risks involved in exploration/drilling, at $2 gas? Seriously.

 

 

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Guest Hester

The real question is when does it kick in. Is it 3-4 years away effective date wise. I think things will turn, just not anytime soon. Also I dont see $9, I see $4 or $5. Just too much gas to drill, too many rigs, and too many leases which need to be HBP.

 

An eventual cold winter will help. It really doesn't matter when it will kick in. There is an aspect of time arbitrage to this commodity and no every investment needs a catalyst. I don't think gas can stay below $4 long term, just because of exploration, drilling, and general/administration costs for producers. So basically gas needs to double just to get to breakeven for most companies. Even if it takes 5 years to double, that's about a 15% compounded return if one can find a way to invest directly, with little risk IMO.

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Has anyone looked into the 'wet' gas argument for the price drop and supply increase.  It doesn't look like this will improve any time soon.

 

http://www.theglobeandmail.com/globe-investor/a-natural-gas-disconnect-bargain-bin-prices-surge-in-supplies/article2368417/

 

The most important factor is the chase for so-called “wet” gas, which has dominated industry activity for the last few years. It’s natural gas that surges to surface accompanied by liquid hydrocarbons like propane, butane and ethane. Those liquids radically shift the dynamics.

 

In oil terms, natural gas currently trades for under $14 a barrel. Propane, meanwhile, sells for around $50 a barrel; butane is roughly $90. At prices like that, natural gas becomes nearly an afterthought. In some wells, companies could make money even giving away the gas, which in those wet wells is called “associated gas.” In others, it takes a very low gas price to make it work.

 

David Hobbs, chief energy strategist at IHS Cera, has calculated that over the next decade, “we can see up to 14-odd BCF [billion cubic feet] a day of associated gas that would still be economic to produce at $1.”

 

With the U.S. currently producing 72 BCF a day, that’s a large percentage.

 

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The issue is people have been predicting a rally in gas for 3 years, ever sense it has fallen from $12 dollars or so. I think its good value now, but just dont see rationality yet. I dont see bankruptcies or take unders. My only prediction is things will get worse before they get better. Everyone is saying a rally is just around the corner and we have to drill for reason xyz. Small curtailments wont cut, and switching to liquids which produce gas as a by product wont either.

 

We dont need all this gas, and some can be produced cheaply and profitably at $5. Until demand really kicks up without being matched by cheap supply, I dont see gas prices going anywhere. This will happen, but I doubt its a next year thing.

 

I have been buying oil backed assets, and getting gas for free. Companies like SD, L, CHK or good acquirers with great balance sheets are where I would be.I wouldnt bet on a company that needs gas to rise over the next 3 years to stay afloat. I dont own CHK because its too gas focused, but they have oil backed assets.

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Hoodlum great post and thanks for the numbers. I have only studied SD in detail, but its similar there for many of the oil and gulf plays. Gas is produced as a by-product, and no one cares about the gas price. This is especially true with oil prices going up.

 

I think gas will continued to be mindlessly drilled due to this. We have oil focused plays, wet gas, deep water gulf, all producing cheap gas. Then we have the mainly gas plays which need to be drilled to hold the leases.

 

On the other side we have shale wells which decline quickly, and reduced drilling / curtailments. Finally we have new long hail Mary supply changes - LNG, Relocation of Petro Chemical industries, Hybrids / Plugins / Nat Gas cars and trucks, and electricity switching to gas from coal.

 

Alot of moving parts, but my money is on gas staying cheap. Long enough for the majors to adjust plans, and for a few of the minors to go insolvent or get taken over. Housing will recover, but everyone calling for it has been off. Same with gas....

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Hoodlum great post and thanks for the numbers. I have only studied SD in detail, but its similar there for many of the oil and gulf plays. Gas is produced as a by-product, and no one cares about the gas price. This is especially true with oil prices going up.

 

I think gas will continued to be mindlessly drilled due to this. We have oil focused plays, wet gas, deep water gulf, all producing cheap gas. Then we have the mainly gas plays which need to be drilled to hold the leases.

 

Are any of you looking at the oilfield service companies? It seems they are in the catbird seat. (I tend to believe they capture more value over a cycle vs. the E&P's, have simpler business models, and lack the hype-pushing, perennial capital-raising CEO's in the E&P space).

 

 

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With a 5yr+ holding period, NA gas is a great complement to NA real-estate. But to make it really work, you need many more Asian purchases in NA O&G fields - plus extensive pipeline & west coast LNG facilities. 5yrs just to get the ports upgraded.

 

With a shorter holding period look to the oilfield service companies. They are running flat out, & that additional activity has begun to spread to the ME O&G fields as well.

 

   

 

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Do any of you guys know of a single producer that can make money, much less a reasonable after tax return given the risks involved in exploration/drilling, at $2 gas? Seriously.

 

pey on TSE claims in recent conference call last week that 99% of their production is profitable at $1 per MCF (hard to believe?)

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