I’ve been looking at natural gas producers for a while but just can’t get myself to buy any. It is just impossible to see a turnaround in natural gas prices. The two that I do have some interest in are making a quick transition to oil:
Sandridge Energy (SD, Financial)
http://www.gurufocus.com/news.php?id=105087
Chesapeake Energy (CHK, Financial)
http://www.gurufocus.com/news.php?id=100055
And a after a quick reading of some news this morning the bearishness on natural gas is everywhere.
Hedgies are Bearish
Hedge funds cut bullish bets on natural gas to the lowest level this year according to the Commodity Futures Trading Commission.
Net-long positions in futures and options combined in four natural-gas contracts decreased by 14,702 futures equivalents to 75,243 in the week ended Aug. 24, the CFTC data showed.
Analysts are Bearish
1) According to Strategic Energy and Economics Research Vice President Ron Denhardt recent US gas production data is showing a 10% year-over-year increase and prices are facing "enormous" downward pressure this winter and through much of 2011, an industry analyst said Monday in reducing his 2010 price forecast by 10%.
2) Merrill Lynch analysts on Tuesday slashed their near-term US gas price
forecasts by double-digit percentages, saying drillers are ignoring price
signals and continuing to grow production. The firm cut its estimate for the fourth quarter by 16% to $4.80/MMBtu and its forecast for 2011 by 17% to $5/MMBtu. Merril blames shale gas drilling which has shown no sensitivity to natural gas prices. As I wrote previously, this is likely due to shale gas drillers needing to establish production quickly in order to hold leases by production and not lose the acreage they have spent billions on.
http://www.gurufocus.com/news.php?id=105169
3) First Energy Analyst Martin King has given up on higher natural gas prices for the next 18 months according to his August 30 report. King stated “Let us reiterate: placing money in the natural gas investment space, aside from special one-time circumstances, is likely to be dead on arrival”
Producers are Bearish
Petrohawk Energy will lay down one or two rigs in the Haynesville Shale this year, idle a third of its rigs there by the end of next year and up to half by the end of 2012 if natural gas prices remain well below
$5/MMBtu, CEO Floyd Wilson said Tuesday. Asked by an investor why the company has only now decided to curb gas production given that prices have been low for some time, Wilson said
that had Petrohawk idled rigs 18 months ago it would have lost three-fourths of its Haynesville leases.
Sandridge Energy has gone even further by acquiring a significant quantity of oil reserves at the cost of enormous dilution to shareholders. With those oil assets Sandridge is going to reduce drilling for natural gas to minimal levels and instead focus on their new oil assets. Other companies like Sandridge are going to find themselves in uncomfortable spots once their hedges entered into in 2008 roll off in the upcoming year. They are going to find themselves with a debt load that was not built for $4 natural gas.
And with analysts bearish, producers bearish and investors bearish that makes me……confused I guess. More often than not when you see this kind of pessimism anywhere is exactly the time to really start considering an investment. But I just can’t see how we get much of a rebound in prices as any increase will quickly result in a ramp up in drilling which will just drive prices back down again.
So that is why I will stay away from pure natural gas producers like Contango (MCF, Financial) and Corridor Resources (CDH, Financial):
http://www.gurufocus.com/news.php?id=105410 http://www.gurufocus.com/news.php?id=101034
And instead look at companies with solid oil production with an upside option should natural gas prices rebound. One to consider seriously is Petrobakken which is cheap on its oil reserves with upside in the Montney Shale: http://www.gurufocus.com/news.php?id=103978
