Every Thursday, EnerCom’s Oil & Gas 360® will deliver media stories, company updates, and research commentary covering the natural gas spectrum. The theme for this week: Make No Debate: The U.S. Kicks Gas.
NATURAL GAS INVENTORY (Week Ended 9/28/12)
Current: 3,653 Bcf
Actual Injection/(Withdrawal): 77 Bcf
Economist Average Estimate: 72 Bcf
Previous: 3,765 Bcf
Click here for the chart with five year averages.
NATURAL GAS IN THE MEDIA
*Transcript of the First Presidential Debate – New York Times
JIM LEHRER: Good evening from the Magness Arena at the University of Denver in Denver, Colorado. I’m Jim Lehrer of the PBS NewsHour, and I welcome you to the first of the 2012 presidential debates between President Barack Obama, the Democratic nominee, and former Massachusetts Governor Mitt Romney, the Republican nominee. This debate and the next three — two presidential, one vice- presidential — are sponsored by the Commission on Presidential Debates. Tonight’s 90 minutes will be about domestic issues, and will follow a format designed by the commission. There will be six roughly 15-minute segments, with two-minute answers for the first question, then open discussion for the remainder of each segment. Thousands of people offered suggestions on segment subjects of questions via the Internet and other means, but I made the final selections, and for the record, they were not submitted for approval to the commission or the candidates. – Read More
*Fact check: Oil and natural gas production under Obama – CNN
The facts show, and President Barack Obama and his Republican challenger Mitt Romney agree, that U.S. production of oil and gas has increased over the past four years. But is this rise because of Obama, or “in spite of his policies,” as the former Massachusetts governor said at Wednesday night’s debate? “All of the increase in natural gas and oil has happened on private land, not on government land,” Romney said. “On government land, your administration has cut the number of permits and licenses in half.” The facts: The Republican nominee’s assertions can be broken down into two parts. The first has to do whether “all of the increases in natural gas and oil” under Obama are attributable to drilling on private land, rather than federal and Indian lands and offshore areas. This statement raises a few questions. Firstly, has there been more oil and gas production, relatively, on private lands versus federal lands? Secondly, does the federal government, through regulations and license approvals, have any impact on oil and gas production on private land? And last, can “all” the increase in production be tied to production on private lands? – Read More
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*Romney: cuts in tax breaks for oil, gas “on the table” – Reuters
Republican presidential challenger Mitt Romney hinted he could eliminate billions of dollars in U.S. oil and tax breaks if he were elected, but the reductions would be far less than what President Barack Obama wants. Romney signaled in the first presidential debate in Denver on Wednesday that annual reductions of some $2.8 billion in tax breaks for oil and natural gas companies could be eventually traded for a lower corporate tax rate if he won on November 6. “If we get that tax rate from 35 percent down to 25 percent, why that $2.8 billion is on the table,” Romney said at the debate in Colorado, a state that produces both fossil fuels and clean energy like solar and wind power. “Of course it’s on the table. That’s probably not going to survive if you get that tax rate down to 25 percent.” Obama’s tax plan overhaul calls for a more moderate reduction in the corporate tax rate of 28 percent. But he has long pushed for steeper reductions in oil and gas breaks of $4 billion annually. – Read More
*Energy comes up early in presidential debates – Houston Chronicle
Just minutes into the debate, the candidates delved into their policies for energy. President Obama mentioned it first, saying he favored increasing domestic oil and natural gas production and noted that had happened during his presidency. Republican challenger Mitt Romney fired back: “All of the increase in natural gas and oil has happened on private land, not on government land.” If he’s elected, Romney vowed to double the current production from federal lands, as well as increasing drilling offshore and in Alaska. He also said he’d clear the way for the Keystone XL pipeline. The he added this: “And by the way, I like coal. I’ll make sure we buy clean coal.” He didn’t, though, explain how that would happen. From here, the candidates went back to retreading their economic plans. – Read More
*Romney, Obama debate natural gas, coal – Pittsburgh Business Times
President Obama and GOP presidential candidate Mitt Romney briefly touched on their positions on natural gas and coal during the first of three debates Wednesday night leading up to the Nov. 6 election. Neither the Marcellus or Utica shales, which are so important to southwestern Pennsylvania’s energy industry, were mentioned specifically. But both Obama and Romney — who have talked up the shale gas boom in the past — discussed how important it was to increase oil and gas production. Obama said he and Romney agreed that domestic energy production must continue to increase. “But I also believe that we’ve got to look at the energy sources of the future, like wind and solar and biofuels, and make those investments,” Obama said according to a transcript of the debate. – Read More
*Romney, Obama Both Overstate Energy’s Role as Jobs Engine – National Journal
As they’ve done on the campaign trail for months, both Mitt Romney and President Obama on Wednesday night proposed higher energy production as a means of helping to bring down the nation’s 8.1 percent unemployment rate. Asked at the Denver presidential debate about the specific differences between their plans to bring back the millions of jobs that have been lost over the past decade, both noted that they agree on at least one point – increased oil and gas drilling will be a key component. Obama also said he would continue to push policies to boost the renewable-energy industry. But as economists have also said for months, energy production – whether through increased oil and gas drilling or boosting renewable energy or both – won’t come close to creating enough jobs to putting most of the nation’s 23 million unemployed people back to work. – Read More
*Apache Kitimat Chief Says Cheniere Deal Changed Expectations – Bloomberg
A recent deal by Cheniere Energy Inc. (LNG) to sell liquefied natural gas based on Henry Hub pricing has made it difficult to sign long-term LNG contracts based on oil prices, the head of Apache Corp. (APA)’s Canadian LNG export projects said. “It created quite a ripple through the marketplace,” said David Calvert, an Apache vice president and manager of the Kitimat LNG joint venture. He said at a conference in Calgary the deal has created “unrealistic expectations.” Calvert said that new projects like the Kitimat LNG project, which is being planned to export Canadian gas to Asia from the British Columbia port of Kitimat, need long-term contracts based on oil prices rather than gas prices. North American natural gas prices have plunged against oil amid a glut. In Asia, natural gas trades at as much as five times U.S. prices. – Read More
*Exxon, BP Estimate Alaska LNG Export Project at $65 Billion – Bloomberg
Exxon Mobil Corp. (XOM), ConocoPhillips, BP Plc (BP/) and TransCanada Corp. (TRP) said a project to liquefy and export natural gas from Alaska will cost as much as $65 billion and take more than 10 years to construct. The venture includes an 800-mile (1,300-kilometer) pipeline from the North Slope to Alaska’s southern coast as well as a liquefaction plant and storage tanks, the companies said in an Oct. 1 letter received by Alaskan Governor Sean Parnell’s office yesterday. The governor had asked the companies to “harden the numbers” on the project by the end of September, Parnell said in a statement. As oil output from the North Slope has dropped, energy companies and Alaska’s government are seeking ways to sell the area’s gas, which may generate as much as $20 billion in annual revenue as demand from Asia increases. The North Slope may hold 35 trillion cubic feet of reserves and more than 200 trillion cubic feet of undiscovered, technically recoverable gas, making it one of the largest sources in the world, according to the governor. – Read More
*Penn State Faculty Snub of Fracking Study Ends Research – Bloomberg
A natural-gas driller’s group has canceled a Pennsylvania State University study of hydraulic fracturing after some faculty members balked at the project that had drawn criticism for being slanted toward industry. The Marcellus Shale Coalition, which paid more than $146,000 for three previous studies, ended this year’s report after work had started, said Kathryn Klaber, coalition president. The earlier studies were co-written by former Penn State professor Tim Considine, an economist now at the University of Wyoming who has produced research on economic and energy issues under contract to trade associations. The first study, in 2009, initially failed to disclose its industry funding and was used by lawmakers to kill a state tax on gas drillers. It was characterized as advocacy for producers by groups such as the nonprofit Pennsylvania Budget and Policy Center in Harrisburg. “It’s been a hot potato,” said Michael Arthur, co- director of the Marcellus Center for Outreach and Research at Penn State, who is one of at least two faculty members who declined to take part in this year’s project. “People are a little more thoughtful about hopping in.” – Read More
RESEARCH COMMENTARY
*Wells Fargo Securities (10.4.12)
Energy Takeaways From Wednesday Night’s Presidential Debate. Last night’s debate between President Obama and Mitt Romney portrayed the differences between each candidate’s plans for the energy sector. Unfortunately, there was not much new — Mr. Romney’s number one goal would be to bring energy independence to America, lower tax deductions/exemptions, and lower the overall tax rates. Mr. Obama would continue to pursue an ”all of the above” approach, although he heavily emphasized green energy while advocating for federal regulation of oil/gas operations. We recognize that, even under a Romney administration, tax breaks for the industry may be eliminated. While President Obama has denounced the long-standing federal tax policy allowing first year expensing of intangible drilling costs (IDCs), Mr. Romney stated that all exemptions/deductions would be examined in an effort to lower the tax rate while maintaining revenue neutrality. We think the IDC provision may have to be sacrificed by Republicans in negotiations on any broader tax reform measures.
*UBS Investment Research (10.4.12)
Injection above consensus and our estimate. Storage rose 77 Bcf, above consensus of 73 Bcf and the UBSe range of 65-75 Bcf. The injection was below 2011’s 97 Bcf injection but in line with the 5-year average of a 76 Bcf injection. Inventories are now 3,653 Bcf, narrowing the surplus vs. 2011 to 244 Bcf but widening the surplus vs. the 5-year average to 296 Bcf.
Weather cooler last week vs. 2011 and the 5-year average. Last week’s weather was 15% and 2% cooler than the comparable year-ago week and 5-year average, respectively. Since May, weather has been 3% cooler than 2011 but 5% warmer than the 5-year average. Roughly 5% of CDDs remain ahead of us.
Forecast injection of 65-75 Bcf next week. We forecast a 65-75 Bcf injection next week, below 2011’s 112 Bcf injection and the 5-year average of an 86 Bcf injection. Over the last month, the weather-adjusted S/D balance has been ~1.7 Bcfd undersupplied vs. the 5-year average and ~4.2 Bcfd undersupplied vs. 2011. However, the balances appear to have loosened each of the last 3 weeks as gas prices have risen. We expect storage to build to a record peak of 3.9 Tcf on 10/31 (0.22 Tcf above the 5-year average and near capacity).
E&Ps discounting long-term prices of $4.60/Mcf. This compares to the 2012 and long-dated (2016) futures curves of $2.82/MMBtu and $4.61/MMBtu. Our top E&P picks are: APC, NBL, EOG and MRO.
Analysis
This week’s injection implies that the weather-adjusted S/D balance loosened 0.5 Bcfd WoW. We estimate the weather-adjusted S/D has been ~1.7 Bcfd undersupplied vs. the 5-year average and ~4.2 Bcfd undersupplied vs. the year ago over the last 4 weeks due to significant price induced fuel switching from coal to natural gas boosting demand. The undersupply vs. the 5-year average is materially 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 attribute the loosening to continued growth in production through September and modest loss of demand back to coal with higher gas prices. We believe that gas prices need to remain weak to reduce drilling activity and the rate of domestic production growth (+4.3% YoY in July), as well as incentivize continued coal-to-gas fuel switching to further reduce the storage surplus. We forecast a 65-75 Bcf injection for next week. We believe that as the storage surplus continues to erode to more manageable levels, gas prices are likely to hold the recent gains but further upside is limited as it would prompt too much fuel switching back to coal. We forecast natural gas prices will average $3.20/MMBtu in 4Q12 and $3.75/MMBtu in 2013.
*Global Hunter Securities (10.4.12)
Summary: Trimming Canadian rig count forecast and estimates: With drilling activity in Canada running almost 30% below year-ago levels, we were not conservative and are dropping our 2H2012 rig count forecast by approximately 12%. Although no new material announcements of budget cuts have been coming from major producers in Canada, we believe there have been stealth cuts in an attempt to lower costs. Obviously gas activity is severely reduced from year-ago levels, but the expectations for increased oil and liquids-rich gas activity appear not to have really materialized. We believe weak equity markets and management caution have kept E&P spending below budgeted levels so far in 2012. We have been cautious with our estimates given the soft rig count quarter to date, so our estimate revisions are fairly minor and only result in three minor price target reductions. Our ratings are unchanged and we have reduced our price targets on CEU, PSN and WRG. We also note that our pressure pumpers (TCW, CFW, FRC) were previously adjusted after management updates. Our top picks in the Canadian OFS space include PSN, CDI and HNL.
*Global Hunter Securities (10.4.12)
Coal fundamentals could recover sooner than expected. The natural gas price uptick since April has led to optimism concerning a quicker coal rebound (Coal and Energy). Some market observers predict that natural gas could hit $3.90 per MMBtu in the next few months (Coal and Energy). The uptick would be good news for thermal coal.
Natural gas price strength. Since the April 2012 low of $1.90 per MMBtu, the natural gas price has risen to approximately $3.21 per MMBtu while coal has declined to $2.15 per MMBtu (Reuters). With transportation costs, coal is now approximately $3.15 per MMBtu, making it cost competitive with natural gas for power generation. The industry has seen utilities switching back to coal when natural gas hit $3.00 per MMBtu (Coal and Energy). On Tuesday, October 2, the Henry Hub spot price closed at $3.21 per mcf, up 69% from the low in April. On Wednesday, October 3 the natural gas November forward settled at $3.42 per mcf.
Gas price needs to increase for all basins to benefit. Right now, the Illinois Basin and Powder River Basin are benefiting from the increased natural gas pricing. However, for CAPP to compete the price needs to break $4.00 per MMBtu due to high production costs and older mining complexes. If the price increases too much, we could see natural gas production pick back up, driving prices back down.
Thermal coal starting to look attractive. We believe interest in the thermal coal shares is going to be picking up shortly. Already we have seen CLD’s (a pure Powder River Basin player) shares rise 30% from $14.21 in the middle of April to close at $18.53 on October 2. Our Buy rating on ACI and Accumulate rating on NRP are reinforced as higher natural gas prices should increase thermal coal consumption by utilities.
*CLSA (10.4.12)
Generally, the budgeting process for 2013 does not get underway until later in the fourth quarter, so there’s some time to go still. That said, as we read the body language, spending is likely to trend flat to down. While we still expect the industry to outspend cashflow again, there has been a stated interest in dramatically narrowing the gap – we’ll see. We would surmise that a good chunk of the savings is likely to stem from fewer unproved acreage purchases. Following a half-decade shale-inspired lease-fest, most producers are pretty well full up on acreage. The take-away is that drilling activity may hold up relatively well. Given how the total onshore rig count has rolled over, we would expect activity to pick up again early next year.
Congenital outspend
Based on aggregated consensus estimates on 65 publically traded E&P companies, cashflow appears poised to grow 13% and capital spending to shrink 6% in 2013 (see Figure 12). However, total capex would still be 11% ahead of cashflow after being 34% ahead this year. The underlying consensus commodity-price assumptions are $3.60/MMBtu for gas and $92/Bbl for oil. Adjusted to match our $4/$94 forecasts, cashflow would increase 17% next year, which would still be 7% short of expected capex. The long and short of it is that producers don’t have much wiggle room to increase drilling activity, although declining service costs and efficiency gains should enable the rig count and the total number of wells drilled to increase. Assuming a 10% net cost and efficiency improvement next year, the rig count could rise by 3.5%. Unless gas rises and holds above $4/MMBtu, virtually all the incremental drilling will be targeting liquids. The current run in the price of gas has certainly brought Cal-13 close to that level, but we’re not there, yet.
Current hedge profiles
Natural-gas hedges for 2013 are thin, although we would expect companies to disclose additional hedges on their 3Q12 calls. Our coverage group currently has hedged only 23% of expected 2013 production versus 42% this year and 46% in 2011 (see Figure 13). There has been an on-going reticence to lock-in a gas price below $4/MMbtu. Producers didn’t hedge on the way down last year and early this year and anecdotally they appear unwilling to on the way up – so far. In our view, hedging won’t start in earnest at least until producers can lock-in material volumes with swaps at $4 at a minimum. We’re not quite there yet. This is important because it stabilized cashflow and could encourage an uptick in dry gas drilling as that level is frequently viewed as an economic threshold for gas-directed activity. Looking further out, Cal-14 is at $4.15/MMbtu and Cal-15 at $4.37/MMBtu, which should start to encourage hedging.
19 estimates range from 55 Bcf to 81 Bcf
The median consensus estimate is a 73 Bcf injection. The five-year average change for this time of year is a 78 Bcf injection. Last year, inventories increased 101 Bcf. Last week, inventories increased 80 Bcf versus the consensus estimate of a 78 Bcf injection. There were 29 CDDs (cooling degree days) during the week ending 28 September compared to the five-year average of 40 CDDs, last year’s 39 CDDs and the prior week’s 30 CDDs.
*Tudor Pickering Holt & Co. (10.4.12)
Gas storage preview ($3.41/mcf) – 10:30EDT. Bloomberg consensus looking for 73bcf injection which is slightly below 10-yr norms of 76bcf on slightly cooler than normal shoulder period weather (more HDD’s and fewer CDD’s than norm). If injection comes in-line with consensus, it suggests the market is ~balanced (our model predicts roughly normal injections) with gas prices well above $3/mcf. Stay tuned.
*Macquarie Energy Newsletter (10.3.12)
Natural Gas Markets
Despite some producer selling seen early in the day yesterday, natural gas prices remained well supported at the $3.40 per mmBtu level. The November contract settled 1.5% higher at $3.531 per mmBtu, the first settle above the key $3.50 level since December 2011. Gas prices rose amid forecasts that continue to call for the return of cool weather across much of the U.S. heading into the first week of October. Futures are lower this morning as the sharp move into producer selling territory has triggered the expected response from both the corporates and spec players. The 6-10 day weather models also paint a less bullish picture today as warmth is forecast across the Northwest next week. Chicago’s temperatures are expected to moderate slightly and range from upper 50s to low 60’s according to our weather desk. Technically, the key level to watch on the upside will be $3.66, which completes a long term head and shoulders patter that extends back to 2011.
*UBS Investment Research (10.2.12)
Forecasting a 65-75 Bcf injection to be reported this week. We expect the EIA to report a 65-75 Bcf injection, compared to 2011’s 97 Bcf injection and the 5-year average of a 76 Bcf injection. We estimate inventories increased to 3,646 Bcf, narrowing the surplus vs. 2011 and the 5-year average to 237 Bcf and 289 Bcf, respectively.
Weather cooler last week vs. 2011 and the 5-year average. Last week’s weather was 15% and 2% cooler than the comparable year ago week and 5-year average, respectively. Since May, weather has been 3% cooler than 2011 but 5% warmer than the 5-year average. Roughly 5% of CDDs remain ahead of us.
Forecasting storage to peak this Fall at 3.9 Tcf. We estimate the weather-adjusted S/D balance loosened >1 Bcfd WoW for the week ending 9/21. We estimate the weather-adjusted S/D balance has been ~2.5 Bcfd undersupplied vs. the 5-year average and ~4.6 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 3.9 Tcf on October 31 (0.22 Tcf above the 5-year average).
E&Ps are discounting $4.60/Mcf long-term, normalized natural gas prices. This compares to the 2012 and long-dated (2016) futures curves of $2.84/MMBtu and $4.59/MMBtu. Our top E&P picks are: APC, NBL, EOG, and MRO.
*Baird Equity Research (last week 9.29.12)
July EIA 914 onshore production increased 0.3% M/M; Lower 48 +0.4% M/M. This is slightly below our adjusted forecast of 0.6% onshore production growth and 0.8% Lower 48 growth. Production increases were New Mexico, Marcellus/Other, Texas, and GoM; partially offset by Wyoming. We forecast August production to decline 0.3-0.9% M/M. Strong gas price action recently highlights increased investor confidence in current storage dynamics and generally stable supply coupled with seasonal tailwinds.
July onshore production increased 0.3% M/M. The data shows onshore production increasing by 0.2 bcf/d, or 0.3% M/M, to 68.5 bcf/d. June onshore production was revised down to 68.3 from 68.4 bcf/d previously. Our proprietary model was forecasting 68.7 bcf/d, +0.6% M/M, adjusted for June revisions. New Mexico drove the increase, driven by new wells and maintenance completion; Texas and Marcellus/Other also contributing.
July Lower 48 production increased 0.4% M/M. EIA data shows July Lower 48 production increased 0.4% M/M to 72.6 bcf/d, with delta versus onshore an increase in GoM production. June data was revised down to 72.3 bcf/d from 72.4 bcf/d previously. Our proprietary model was forecasting 72.9 bcf/d, +0.8% M/M, adjusted for June revisions.
August production forecast to decline modestly -0.3 to -0.9% M/M. We project August onshore production to decrease to 68.3 bcf/d, -0.3% M/M. We also forecast August Lower 48 production to decrease 0.9% M/M to 71.9 bcf/d. The bulk of the decline is attributed to Gulf Coast and offshore GoM due to hurricane shut-ins. July and August production in aggregate is essentially flat. Despite the decrease in gas rig count, we do not anticipate US onshore production to turn over in the near term.
Production trends by region. Onshore production increases were New Mexico +0.09 bcf/d, Texas +0.09 bcf/d, and Other/Marcellus +0.08 bcf/d. Decline was Wyoming -0.07 bcf/d. Offshore GoM increased 0.07 bcf/d.
Storage/tightness still the focus, but gas sentiment improving. With only five reports remaining until the pivotal end of October peak storage number, investors remain amply focused on weekly storage reports and implied market tightness, though seemingly more content with current storage dynamics (likely enter winter with ~4Tcf (+/-) in storage). Seasonal tailwinds (rolling to November front month) also supportive of strong gas price action, with the front month currently trading at ~$3.30/MMBtu. We are cautiously optimistic on natural gas dynamics heading into the winter months, with the concerns around testing storage capacity abating as we progress through the fall shoulder season.
*Raymond James Equity Research (last week 9.27.12)
El Nino…La Nina…all we want is just a normal winter. With the October contract rolling off and natural gas prices trading more than $0.20 cents above the $3 level, are we set for a head fake in natural gas prices? With 7 more weeks left of injections, we expect coal-to-gas switching to subside, but believe overall power demand will remain strong enough to eat away at the y/y surplus and avoid testing max storage (4.0-4.1 Tcf); however that will only happen if we get a normal winter heating season. By our math, with 3,576 Bcf currently in storage and likely another 7 weeks of injections remaining, using weather adjusted injections of 484 Bcf, we need to run at least 3.25 Bcf/day tighter y/y in order to reach 3.9 Tcf in storage. With varying weather forecasts for this coming winter and 2013, we believe natural gas prices have to remain range bound over the near term ($2.50 – $3.00 range), to continue to incentivize coal-to-gas switching. Last month’s slow down in production was just a short blip as production has climbed back to near record levels. With that said, it appears that the market is in better balance, but these next few weeks of injections could tell us if the rebound in natural gas prices was more of a head fake than an indication that the market will remain at these tight levels through the winter.
*Global Hunter Securities (last week 9.27.12)
Summary: The EIA’s Weekly Natural Gas Storage estimate for the latest week, ended September 21, 2012, indicated a big round of new injections, with a net 80 Bcf new injections in the Lower 48, resulting in a final storage balance of 3.576 Tcf. New injections beat expectations in surveys generated by Platts and Bloomberg. The producing region injected an additional 29 Bcf in the latest week, growing YoY at a 11.3% clip, leading the Lower 48 growth rate of 8% YoY. The East consuming region added another 46 Bcf, and the West added another 5 Bcf. Long-term comparisons seemed to easing, with some measures of storage growth rates suggesting the rate of new storage is slowing compared to the trends seen last year at this time when there were 111 Bcf net new injections. The situation is, however, much better than what occurred last year, when new injections continued to build earlier in the year at a strong weekly pace, resulting in an over-stored situation going into the winter-less-winter of 2011-2012. Near-term temperature forecasts seem to suggest a slightly warmer than typical winter this year in the Lower 48. Domestic electric power demand from natgas is somewhat helpful, but seems to be somewhat offset by a slower coal switching cycle in recent months. Additional charts begin on page 2.
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