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NATURAL GAS INVENTORY (Week Ended 8/17/12)

Current: 3,308 Bcf
Actual Injection/(Withdrawal): 47 Bcf
Economist Average Estimate: 40 Bcf
Previous: 3,261 Bcf

Click here for the chart with five year averages.

NATURAL GAS IN THE MEDIA

*Romney to Declare Goal of US Energy Independence by 2020 – CNBC

Republican presidential candidate Mitt Romney will lay out policies on Thursday aimed at achieving North American energy independence by 2020 by pursuing a sharp increase in production of oil and natural gas on federal lands and off the U.S. coast. Romney is to unveil his plan at a truck and supply business in Hobbs, New Mexico, as he seeks to draw a sharp contrast between his energy policies and those of President Barack Obama and detail in part how he would rekindle job growth in the United States. – Read More

*Strange Bedfellows Debate Exporting Natural Gas – Businessweek

The shale gas revolution is starting to pay small dividends for U.S. consumers. As electrical utilities rush to switch from coal to gas, peak electricity rates have fallen in nearly every market. According to the U.S. Consumer Price Index, utility gas service for things like heating and cooking is now 13 percent cheaper than it was 12 months ago. That’s great and all, but taken together those savings don’t add up to much. Electricity and gas bills account for only about 4 percent of our total spending. While the recent bounty of cheap natural gas helped revive U.S. manufacturing, which has added 500,000 jobs since February 2010, its broader benefits to the U.S. economy are harder to come by. There simply aren’t enough uses for cheap natural gas to make a big impact on growth or costs; not yet, at least. As a result, natural gas producers have fallen victim to their own success. They’ve drilled so much so quickly that they’ve crashed the price to below $3 per million Btu. In many cases, drilling natural gas these days is a losing proposition, which is why it’s slowed down so much. There are only 484 natural gas rigs operating in the U.S. right now, about half as many as a year earlier. – Read More

*Pa.: Okla. energy firm’s data filled with errors – Wall Street Journal

The Pennsylvania Department of Environmental Protection says natural gas drilling company Chesapeake Energy last week filed an important Marcellus Shale production report containing so many errors a state database rejected it. DEP spokesman Kevin Sunday said on Tuesday a previous statement by Oklahoma City-based Chesapeake Energy Corp. that suggested state databases were the problem wasn’t entirely accurate and omitted important points. “DEP’s production database functioned exactly as designed by rejecting reports that contain obvious data entry errors,” Sunday said. For example, Chesapeake attempted to report production information on wells where the drilling start date wasn’t listed; attempted to report more producing days than the number of days in the reporting period; and attempted to report drilled wells as wells that were not drilled, Sunday said.  Chesapeake also waited until the end of a 45-day grace period to submit data, Sunday said. – Read More

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*Conference drills in on natural gas issues – Houston Chronicle

Energy industry leaders called for policies that encourage natural gas production in the United States, saying during a downtown Houston event Wednesday that restrictions on domestic energy supply threaten the nation’s economic and environmental health. Speaking at the North American Prospect Expo at the George R. Brown Convention Center, executives and advocates for major energy and chemical companies said efforts to limit hydraulic fracturing for natural gas contradict goals to reduce carbon emissions and strengthen the economy. Hydraulic fracturing involves pumping massive volumes of water, sand and chemicals deep underground to increase well flow from shale and other tight rocks. Critics fear it might taint water supplies and that related activities can cause localized earthquakes. – Read More

*Vestas to Cut More Jobs – Wall Street Journal

Denmark’s Vestas Wind Systems AS, VWS.KO +5.04% the world’s largest manufacturer of wind turbines, Wednesday cut its full-year expectation for delivered orders and said it would lay off more workers as it scrambles to swing back to profit. Vestas said it would slash an extra 1,400 jobs, on top of the 2,300 layoffs announced in January, bringing its total workforce down to about 19,000 by year-end. The company couldn’t rule out further layoffs. The move will bring in €100 million ($124.7 million) of cost savings this year, in addition to €150 million already planned, Vestas said. The company said this will help ensure profitability in 2013, when the wind-turbine sector is facing a massive downturn due to macroeconomic headwinds and the threatening expiration of a U.S. tax credit on wind-power production. – Read More

*Manufacturers, producers see different futures for US natural gas supplies – Platts

The rapid development of US shale natural gas resources has created an opportunity for the nation to establish a new energy paradigm, provided that the proper energy policies are put into place, speakers at the North American Prospect Expo said in Houston said Wednesday. Jim Tramuto, vice president of Southwestern Energy, pointed to his company’s success at tapping into the Fayetteville Shale in Arkansas, as an example of what shale gas producers in basins across the country have been able to accomplish in a few years. – Read More

*Pennsylvania gas boom under way – UPI

Natural gas production from the Marcellus shale play in Pennsylvania is up more than 80 percent from 2011, the state government said. A Platts review of information from the Pennsylvania Department of Environmental Protection said natural gas production in the Marcellus shale play for the first six months of 2012 increased 82 percent compared with the same time last year. Production reached 4.36 billion cubic feet per day for the first half of 2012, while operators reported 2.5 billion cubic feet per day during the same time last year. Chesapeake Energy accounted for roughly one-quarter of the unconventional natural gas production in the state during the first six months. – Read More

*Reliance on natural gas sparks concern – The Boston Globe

New England’s increasing reliance on natural gas has regional energy officials worried about potential shortages over the next few years that could disrupt electricity production, especially if the area is hit with an extremely cold winter. Abundant supplies and falling prices have led many power producers and home and business owners to switch to natural gas in recent years, but federal energy officials and the operator of the region’s power grid, ISO New England, say they are concerned that pipeline capacity is not keeping up with growing demand. In the case of an extended snap of very low winter temperatures and a rise in heating demand, pipelines might not be able to transport enough gas for both homes and power producers, leading to cutbacks in electricity generation and possible power interruptions, according to a study by ISO New England. – Read More

*CSU seeks to study emissions from drilling operations – Coloradoan

Garfield County commissioners are set to hear from CSU researchers Monday about a proposal to study emissions from natural gas operations. Some residents in the Battlement Mesa community are worried that nearby drilling is exposing them to hazardous substances. County officials say research is needed to fill gaps in what is known about air emissions and the impacts of natural gas extraction near residential communities. At the county commissioners’ meeting Monday, Colorado State University researchers and Air Resource Specialists Inc. plan to propose a three-year study of emissions. – Read More

*Shell, Chevron to swap gas assets in Australia – Reuters

Royal Dutch Shell Plc will pay $450 million and swap interests in two fields off the Australian coast with Chevron Corp holdings in a $30 billion-plus liquefied natural gas (LNG) project that has been plagued by infighting among its stakeholders. Shell is expanding its interest in the Browse LNG project, which has suffered cost  blowouts and been caught up in rows about the best location an LNG plant and opposition from environmentalists and Aboriginal landowners. The project is led by Australia’s largest oil and gas firm, Woodside Petroleum, with Shell, BP, Chevron, and BHP Billiton also having interests. – Read More

*Shale gas failure offers rescue for EU green energy drive – Reuters

Europe has been unable to repeat the shale gas revolution that has swept the United States, and that could prove to be the unlikely savior of long-term EU efforts to spur renewables and curb greenhouse gases. The United States has managed to lower greenhouse gas emissions as well as energy prices as cheap shale gas has displaced coal, prompting calls from industry for Europe and others to follow suit. The argument is that natural gas, which emits less CO2 than coal, can be a friend, not a foe, to environmentalists. – Read More

RESEARCH COMMENTARY

*Baird Equity Research (8.23.12)

August 17 natural gas storage report bearish for near-term gas prices (~$2.70/MMbtu). The EIA reported storage well ahead of Street estimates as more moderate weather (+4% CDD vs. normal, -1% Y/Y) wanes on market tightness in peak demand season. The 47 Bcf injection was at the high end of the 34-53 Bcf range. Storage levels 12% higher than five-year average, down materially from March peaks. Recent storage trends still leave us optimistic on dynamics into the fall.

Injection well ahead of Street. The EIA reported 3,308 Bcf of working natural gas in storage as of Friday, August 17, representing a 47 Bcf injection from the prior week. The report was bearish versus the consensus estimate of 40 Bcf injection (range of 34-53 Bcf) and our 42 Bcf estimate. Investors reacting negatively to the miss and likely extrapolating the break in tightness forward (-1.2 Bcf/d vs. -3.2 Bcf/d last week). Still comfortable with our reasonably constructive outlook into the Fall, as we only need ~1Bcf/d tightness to remain sub-4 Tcf at the end of October.

Market tightness waning but likely a function of seasonality. Market tightness (relative under-supply) was -1.2 Bcf/d this week (-0.8 Bcf/d weather adjusted) vs. the five-year, lower than the prior-six-week average of -4.9 Bcf/d and well below last week’s -3.2 Bcf/d. The trend in tightness factors still somewhat as expected given peak cooling demand (read: low average injections) and more average weather vs. recent weeks, but nonetheless disconcerting given the tenuous balance in the gas market heading into fall. Despite the recent break in tightness, we estimate that we need ~1 Bcf/d tightness through October to stay sub-4 Tcf and comfortably below ~4.2 Tcf max capacity.

Fall storage outlook remains key. Current working gas storage remains materially above one-year and five-year averages at 402 Bcf and 359 Bcf higher, respectively, though down notably and sequentially each week from March peaks of 893 Bcf (+57%) and 928 Bcf (60%), respectively. Weather less of a tailwind this week.

Gas futures trading down, breaking recent range. At the time of writing, front month (September) gas futures trading down 4% at ~$2.70/MMbtu, breaking below the recent trading range of $2.75-$3.00/MMbtu.

Tightness/supply in focus for gas price. Encouraged by rate of reduction in storage surplus and reduced required minimum tightness to avoid full storage, as -1.0 Bcf/d tight seems realistically achievable in our view (even when assuming average weather impact). Improving risk/reward into fall shoulder season.

*UBS Investment Research (8.23.12)

Injection higher than consensus expectations and our estimate. Storage rose 47 Bcf, above consensus of 40 Bcf and the UBSe range of 35-45 Bcf. However, the injection was below both 2011’s 73 Bcf injection and the 5-year average of a 53 Bcf injection. Inventories are now 3,308 Bcf, narrowing the surplus for the 17th consecutive week vs. both 2011 and the 5-year average to 402 Bcf and 367 Bcf, respectively.

Weather last week was cooler than both the year-ago and the 5-yr average. Weather was 3% & 4% cooler than the comparable year ago week & the 5-year average, respectively. It was the first time in 9 weeks weather was cooler than the 5-year average. Since May, weather has been 4% cooler than 2011 but 7% warmer than the 5-year average. Roughly 31% of CDDs remain ahead of us.

Forecast injection of 55-65 Bcf next week. We forecast a 55-65 Bcf injection next week, vs. 2011’s 55 Bcf injection and the 5-year average of a 59 Bcf injection. Over the last month, the weather adjusted S/D balance has been ~2.9 Bcfd undersupplied vs. the 5-year average & ~4.5 Bcfd undersupplied vs. 2011. We expect storage to build to a record peak of 3.95 Tcf on 10/31 (0.27 Tcf above the 5 yr avg and near capacity).

E&Ps discounting long term prices of $4.50/Mcf. This compares to the 2012 & long-dated (2016) futures curves of $2.72/MMBtu and $4.35/MMBtu. Our top E&P picks are: APC, OXY, NBL, and MRO.

Analysis

This week’s injection implies that the weather adjusted S/D loosened slightly WoW. We estimate the weather adjusted S/D has been ~2.9 Bcfd undersupplied vs. the 5-year average and ~4.5 Bcfd undersupplied vs. the year-ago over the last four weeks due to significant price induced fuel switching from coal to natural gas boosting demand. The undersupply vs. the 5-year average is looser than the 2Q average of 4.6 Bcfd and the 1Q average of 3.4 Bcfd of undersupply relative to the 5-year average. We believe that gas prices need to remain weak to reduce drilling activity and the rate of domestic production growth (+4.3% YoY in May), as well as incentivize continued coal-to-gas fuel switching to prevent storage from exceeding capacity this fall. We forecast a 55-65 Bcf injection for next week. We believe material tightening in the S/D balance is necessary to enable the market to balance without the benefit of coal to gas fuel switching. Additional tightening (to the tune of >4 Bcfd) is required to displace fuel switching demand from coal, tighten the weather-adjusted oversupply, and enable natural gas prices to exceed $4.00/MMBtu.

*Tudor Pickering Holt & Co. (8.22.12)

Coal stock thoughts (KOL $25) – Coal stocks +3% yesterday on CSPAR ruling, CAPP levered names JRCC/ANR up ~6% (~10% intraday).  Ruling certainly optically positive for bludgeoned coal stocks, but in a $2-4/Mcf gas world where much coal is “out of the money”, the rule had limited incremental impact.  With upcoming met settlement expected to fall below $200/tonne (yikes! spot <$170) and forward steam coal prices still below marginal cost of production, fundamentals still bleak for coal group.  Favorite way to play coal space remains low cost producers…CNX top pick followed by CLD.

*UBS Investment Research (8.21.12)

Forecasting a 35-45 Bcf injection to be reported this week. We expect the EIA to report a 35-45 Bcf injection, below 2011’s 73 Bcf injection and the 5-year average of a 53 Bcf injection. We estimate inventories increased to 3,301 Bcf, narrowing the surplus for the 17th consecutive week vs. 2011 and the 5-year average to 395 and 360 Bcf, respectively.

Weather last week was cooler than both the year-ago and the 5-yr average. Weather was 3% & 4% cooler than the comparable year ago week & the 5-year average, respectively. It was the first time in 9 weeks weather was cooler than the 5-year average. Since May, weather has been 4% cooler than 2011 but 7% warmer than the 5-year average. Roughly 31% of CDDs remain ahead of us.

Forecasting storage to peak this Fall at 3.95 Tcf. We estimate the weather-adjusted S/D balance tightened 0.8 Bcfd WoW for the week ending 8/10. We estimate the weather adjusted S/D balance has been ~2.4 Bcfd undersupplied vs. the 5-year average and ~4.1 Bcfd undersupplied vs. the year ago over the last month due to significantly larger price induced fuel switching from coal to natural gas boosting demand. We expect storage to build to a record peak of 3.95 Tcf on October 31 (~0.27 Tcf above the 5 year average).

E&Ps are discounting $4.50/Mcf long-term, normalized natural gas prices. This compares to the 2012 & long-dated (2016) futures curves of $2.71/MMBtu and $4.41/MMBtu. Our top E&P picks are: APC, OXY, NBL, and MRO.


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Important disclosures: The information provided herein is believed to be reliable; however, EnerCom, Inc. makes no representation or warranty as to its completeness or accuracy. EnerCom’s conclusions are based upon information gathered from sources deemed to be reliable. This note is not intended as an offer or solicitation for the purchase or sale of any security or financial instrument of any company mentioned in this note. This note was prepared for general circulation and does not provide investment recommendations specific to individual investors. All readers of the note must make their own investment decisions based upon their specific investment objectives and financial situation utilizing their own financial advisors as they deem necessary. Investors should consider a company’s entire financial and operational structure in making any investment decisions. Past performance of any company discussed in this note should not be taken as an indication or guarantee of future results. EnerCom is a multi-disciplined management consulting services firm that regularly intends to seek business, or currently may be undertaking business, with companies covered on Oil & Gas 360®, and thereby seeks to receive compensation from these companies for its services. In addition, EnerCom, or its principals or employees, may have an economic interest in any of these companies. As a result, readers of EnerCom’s Oil & Gas 360® should be aware that the firm may have a conflict of interest that could affect the objectivity of this note. EnerCom, or its principals or employees, may have an economic interest in any of the companies covered in this report or on Oil & Gas 360®. As a result, readers of EnerCom’s reports or Oil & Gas 360® should be aware that the firm may have a conflict of interest that could affect the objectivity of this report.