The contrarian in me makes it hard not to be interested in natural gas producers. But every time I look at them they send me messages that in the medium term natural gas prices are not likely to improve.
I wrote about Chesapeake a while back who are clearly not optimistic about a price improvement and are trying to make a huge move to unconventional oil.
http://www.gurufocus.com/news.php?id=108752
I saw in the Globe and Mail yesterday that Encana is also not optimistic on prices:
Without formally abandoning the target, the company signalled a retreat in its growth strategy by cutting its capital-spending plan by $200-million (U.S.) for the rest of this year, a move Encana called a “deferral” of spending until next year.
“We will not pursue growth at any cost,” Randy Eresman, chief executive officer of Encana, told analysts and investors on a conference call Wednesday to discuss quarterly results.
The price of gas is down by about 50 per cent since the start of 2009, falling to one of its lowest points in a decade. Even though use of the commodity has risen – the hot summer boosted demand for air conditioning powered by gas-fired electricity plants – supply has easily sated demand. The emergence of prolific shale gas discoveries is boosting supply and production. In the United States, gas production is up 17 per cent in the past five years, near a four-decade high.
Investors should “fear” the potential for low gas prices through 2011 and potentially 2012, said commodity analyst Martin King of FirstEnergy Capital in Calgary.
“If you are not already walking away from the natural gas space, you probably should start, and if you are already walking, you might want to start thinking about running away,” Mr. King advised investors in a report this month.
Encana said it’s ready to retreat further if gas prices remain low.
Mr. Eresman was much more bullish earlier in the year. Just three months ago, Encana increased capital spending by $500-million, but he conceded on Wednesday the new outlook includes the spectre of an “extended period of lower prices.”
Another casualty of the uncertain outlook for gas prices appears to be Encana’s $1-billion-plus partnership with China National Petroleum Corp. to drill additional wells in northeastern British Columbia, another shale-gas hotbed. The potential partnership was announced in June, and in July Mr. Eresman said talks were “developing very well.”
On Wednesday, Mr. Eresman didn’t mention CNPC until asked about it by an analyst. Mr. Eresman said talks continue but “I’m not sure where they’re going to go.” He suggested there was a disconnect between CNPC’s calculation of the project’s long-term value and Encana’s assessment of the value of its holdings.
With the cut in capital spending, Encana also trimmed its production forecast, estimating growth per share of 12 per cent this year, well short of the 15-per-cent annual rate needed to double production.
Encana shares fell 3.4 per cent on Wednesday, by far the worst showing in the 47-member TSX energy index, which rose 0.02 per cent.
Mr. Eresman’s move to ease back from his aggressive growth strategy will calm investors worried about the company’s strategy, said analyst Andrew Potter, a CIBC World Markets analyst.
“Investors have been concerned about Encana’s high spending plans in a weak gas price environment, and this should help alleviate those fears,” Mr. Potter said in a report on Wednesday.
A year ago, Encana split itself in two, creating Encana, the natural gas company, and Cenovus Energy Inc., home to the former firm’s oil sands assets. Encana said the stock market wasn’t fairly valuing the oil sands holdings and their potential.
If natural gas prices were to improve some of these companies are selling at incredible prices today. But if some of these giant shale plays truly are economic at $4 gas, then these plays will continue to be drilled.
I'm very tempted by Chesapeake because they are in the plays with the best economics and have partners carrying a large amount of their drilling costs. So even if gas prices stay low they have an advantage over many competitors. They also have the kicker of what could be a large amount of unconventional oil acreage that the stock market is ignoring.
I truly just don't know what to do. And when that is the state you are in the decision for an investor should be obvious. Don't do anything.
It must be incredibly frustrating for these companies who thought they had hit the motherload when they added all of this shale areage to their portfolios only to find out their success has undermined the price of the commodity. Who could have seen that coming in 2005 when it looked like we were in for a natural gas supply problem ?
I wrote about Chesapeake a while back who are clearly not optimistic about a price improvement and are trying to make a huge move to unconventional oil.
http://www.gurufocus.com/news.php?id=108752
I saw in the Globe and Mail yesterday that Encana is also not optimistic on prices:
Encana retreating from growth plan
Encana (ECA-T28.81-0.32-1.10%) is backing down from its ambitious growth plan, cutting spending as the company braces for the natural gas glut to weigh on prices for an extended period.
North America’s second-largest natural gas producer has been widely criticized by investors this year for setting a goal to double its gas output by 2014 even as gas prices tumble amid abundant supplies.
Without formally abandoning the target, the company signalled a retreat in its growth strategy by cutting its capital-spending plan by $200-million (U.S.) for the rest of this year, a move Encana called a “deferral” of spending until next year.
“We will not pursue growth at any cost,” Randy Eresman, chief executive officer of Encana, told analysts and investors on a conference call Wednesday to discuss quarterly results.
The price of gas is down by about 50 per cent since the start of 2009, falling to one of its lowest points in a decade. Even though use of the commodity has risen – the hot summer boosted demand for air conditioning powered by gas-fired electricity plants – supply has easily sated demand. The emergence of prolific shale gas discoveries is boosting supply and production. In the United States, gas production is up 17 per cent in the past five years, near a four-decade high.
Encana blamed its spending cut on high costs to complete wells in the hot Haynesville shale gas play in Louisiana and Texas, where service companies have jacked up prices. Haynesville is a big source of the current gas glut because producers such as Encana are wildly drilling wells to retain their rights to land in the region.
Investors should “fear” the potential for low gas prices through 2011 and potentially 2012, said commodity analyst Martin King of FirstEnergy Capital in Calgary.
“If you are not already walking away from the natural gas space, you probably should start, and if you are already walking, you might want to start thinking about running away,” Mr. King advised investors in a report this month.
Encana said it’s ready to retreat further if gas prices remain low.
Mr. Eresman was much more bullish earlier in the year. Just three months ago, Encana increased capital spending by $500-million, but he conceded on Wednesday the new outlook includes the spectre of an “extended period of lower prices.”
Another casualty of the uncertain outlook for gas prices appears to be Encana’s $1-billion-plus partnership with China National Petroleum Corp. to drill additional wells in northeastern British Columbia, another shale-gas hotbed. The potential partnership was announced in June, and in July Mr. Eresman said talks were “developing very well.”
On Wednesday, Mr. Eresman didn’t mention CNPC until asked about it by an analyst. Mr. Eresman said talks continue but “I’m not sure where they’re going to go.” He suggested there was a disconnect between CNPC’s calculation of the project’s long-term value and Encana’s assessment of the value of its holdings.
With the cut in capital spending, Encana also trimmed its production forecast, estimating growth per share of 12 per cent this year, well short of the 15-per-cent annual rate needed to double production.
Encana shares fell 3.4 per cent on Wednesday, by far the worst showing in the 47-member TSX energy index, which rose 0.02 per cent.
Mr. Eresman’s move to ease back from his aggressive growth strategy will calm investors worried about the company’s strategy, said analyst Andrew Potter, a CIBC World Markets analyst.
“Investors have been concerned about Encana’s high spending plans in a weak gas price environment, and this should help alleviate those fears,” Mr. Potter said in a report on Wednesday.
A year ago, Encana split itself in two, creating Encana, the natural gas company, and Cenovus Energy Inc., home to the former firm’s oil sands assets. Encana said the stock market wasn’t fairly valuing the oil sands holdings and their potential.
If natural gas prices were to improve some of these companies are selling at incredible prices today. But if some of these giant shale plays truly are economic at $4 gas, then these plays will continue to be drilled.
I'm very tempted by Chesapeake because they are in the plays with the best economics and have partners carrying a large amount of their drilling costs. So even if gas prices stay low they have an advantage over many competitors. They also have the kicker of what could be a large amount of unconventional oil acreage that the stock market is ignoring.
I truly just don't know what to do. And when that is the state you are in the decision for an investor should be obvious. Don't do anything.
It must be incredibly frustrating for these companies who thought they had hit the motherload when they added all of this shale areage to their portfolios only to find out their success has undermined the price of the commodity. Who could have seen that coming in 2005 when it looked like we were in for a natural gas supply problem ?
