$5.50/Mcf Natural Gas Price Forecast By Raymond James For Full Year 2010: Higher Productive Environment In Prolific Shale Plays And Above Normal Levels Of Storage Key Factors
December 7, 2009 - The Wall Street Transcript has just published Oil & Gas Production and Distribution Report offering a timely review of the sector. This Special Report contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. Please find an excerpt below.
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DARREN HOROWITZ joined Raymond James & Associates in 1999, and spent his first three years working within equity research as a Retail Liaison and equity product Analyst before joining the energy research team in 2002. As an Analyst, he focused on the offshore drillers, manufacturers and diversified service companies before shifting his focus to the burgeoning midstream suppliers sector in 2007.
TWST: Are we stuck here in a 5-plus-or-minus price range for gas?
Mr. Horowitz: When you look at the supply/demand fundamentals of the domestic natural gas market, there are several variables that we consider. First, natural gas storage levels are now above 3.8 Tcf, approximately 20% above the normal level for this time.
As we have witnessed, the marginal cost of production has decreased across the board, with the most pronounced impact being experienced in the prolific shale plays - Haynesville, Eagleford, etc. That said, when we consider improved capital market access and how much of that capital is being spent through the drill bit in these and other nonconventional areas, it certainly argues for a sustainably higher productive environment for the foreseeable future. Most importantly, we really haven't experienced the significant natural gas production rollover that the market was previously forecasting.
As a matter of fact, when reviewing the sequential production figures, it suggests supply is only fading modestly. Furthermore, we've stacked up quite an inventory of wells that have been drilled but not yet completed or hooked up to gathering lines. That said, should the slope of the forward natural gas curve improve in the near term, the associated productive response from those wells being completed/hooked up could be material.
Secondly, we can't forget about the potential impact of incremental LNG entering the Gulf Coast. While it's difficult to quantify, additional cargoes entering the domestic market this winter could further compound an already oversupplied market. The offsetting mechanism to this supply issue, obviously, is going to price-sensitive demand. To that point, we've only seen a minimal increase in industrial/commercial demand recently, and we're concerned that the magnitude of change could be offset by gas-to-coal switching in the coming months, which would mark a trend reversal from earlier this year. Absent any colder-than-normal spells this winter, an oversupplied market may continue well into FY10. Creating a perpetuating overhang may act to keep a lid on pricing in the 5 to 6/Mcf range.
TWST: And foreseeable is certainly the balance of this year. How about in the next year?
Mr. Horowitz: Yes, our current fourth quarter 2009 forecast is 4.75/Mcf, and we are forecasting a 5.5/Mcf number for full-year 2010.
TWST: So a little bit better, but certainly not exciting?
Mr. Horowitz: Correct, it's difficult to get more constructive on the natural gas outlook when you are looking at 404 Bcf of additional supply in storage versus the same time last year - as of the Nov. 25, 2009, injection - a large inventory of drilled wells, LNG as an x-factor and relatively lackluster incremental industrial/commercial demand.
TWST: If you are right and we stay in those price ranges, what's that going to do to production here? Will we see more of a shut-in or slower E&P?
Mr. Horowitz: As I mentioned, one of the most interesting phenomenons taking place within the natural gas market is the decrease in marginal cost of production across the entire U.S. landscape, most fueled by the emerging shale plays. Simply put, high-grading efforts by operators in more prolific shale plays - higher initial production rates and more moderate initial sloping decline curves - coupled with improved technology through the drill bit and downhole, as well as more affordable service equipment costs have allowed producers to still achieve targeted returns in certain plays at existing forward prices.
That said, we expect producers to recalibrate their capital spend into 2010, allocating incremental dollars toward the most financially beneficial areas and continuing to capitalize on the contango trend within the natural gas futures market.
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