In recent weeks natural gas prices have had a bit of a bounce, now approaching $4 per mcf. Is this the start of a significant recovery in prices?
A lot of people have been surprised at how long natural gas prices have stayed low. Check out the slide below from Chesapeake (CHK)’s April 2009 presentation:
Chesapeake thought that the “fix was in” for low natural gas prices early in 2009. The company saw natural gas averaging $4 to $6 in 2009 and $7 to $9 in 2010 and beyond.
We are in 2013 now and over those four years, we have rarely touched as high as $4!
One company that made the move to unconventional “tight” oil early and away from natural gas was EOG Resources. This has helped EOG weather the low natural gas price environment of the last several years.
EOG got into both of the main unconventional oil plays in the U.S., the Bakken in North Dakota and the Eagle Ford in Texas.
I recently watched an interview with EOG’s CEO Mark Papa, hoping to get some insight on what is in store for natural gas prices in 2013 and beyond. In the interview Papa answered several questions that I listened to with keen interest.
Key Question 1 - Why is he shifting his company away from natural gas and towards oil?
Papa's answer was pretty simple: The profit margins from producing North American crude oil are much larger than those that can be realized from producing North American natural gas.
Key Question 2 - When will natural gas prices turn?
Papa's answer is that he sees depressed natural gas prices for the next three or four years. After that he expects to see an equilibrium price that at least creates a decent profit on natural gas production for the industry.
Key Question 3 - Natural gas production in the U.S. is still rising. How much longer is that going to continue?
The best guess that Papa has is that domestic gas production will flatten out in 2013 as the momentum from connecting already drilled natural gas wells subsides and the lower rig count kicks in.
Key Question 4 - At what price would EOG start to get interested in drilling natural gas wells again?
Papa sees a $4 per mcf to $5 per mcf price for natural gas over the next three to four years, after which it will rise to a $6 per mcf range which is when EOG will get back in the natural gas game.
Key Question 5 - Where does he see the price of oil in 2013?
Papa thinks 2013 will see WTI oil around $90 and stable.
It appears that Papa thinks that $6per mcf is the magic number at which the American natural gas industry can make enough of a profit to stay motivated to drill natural gas wells. That is fairly consistent with what I’ve heard others in the industry suggest.
Yet here we remain, with natural gas under $4. It will be interesting to see how accurate Papa’s projections turn out to be.
For companies like EOG that have high-return oil wells to drill, these low natural gas prices aren't a death sentence. For those names that don't have oil assets, they might be.