For those awaiting a better natural gas market, a scriptural reference may be the order of the day—namely, that “endurance produces character, and character produces hope.” And for those with the character to have charted a course in natural gas, hope does endure that brighter days lie ahead, even though the exact timing of a gas-price recovery remains elusive.
Encouragingly, analysts increasingly point to structural factors boosting natural gas demand as they lay out timelines for a likely gas recovery. These include rising exports of natural gas to Mexico; gas-fired power generation replacing coal power retirements; and expanding gas demand from the industrial renaissance sweeping the U.S., prompting such projects as ethane crackers and ammonia plants.
The liquefied natural gas (LNG) sector is also cited as a factor offering relief to domestic pricing by providing access to export markets for natural gas. However, both LNG projects and ethane crackers involve long lead-times, such that their impact will be felt first on a smaller scale in 2016 and more fully in 2017 and 2018. Gas-to-liquids (GTL) projects are also on the drawing board, with South Africa’s Sasol, for example, planning a massive combined ethane cracker and gas-to-liquids (GTL) complex in Lake Charles, Louisiana.
So, the signs are that the tide is turning—especially with the Baker Hughes gas rig count down some 60% from its October 2011 peak, indicating U.S. supply may flatten, or decline.
But will natural gas pricing gain traction only in 2016-2017, with a clear step-up in industrial demand and potential LNG exports? Or could it find its footing sooner, and surprise to the upside in 2014-2015? If so, which stocks would you want to own?
Rehan Rashid, managing director and head of energy research at FBR Capital Markets, is a standard-bearer for recovering natural gas prices, projecting a jump to $5 per thousand cubic feet (Mcf) next year. Thereafter, his price deck assumes a $4.50 average price for both 2015 and 2016. This compares to a consensus forecast of $4.20 for next year, followed by about a $4.40 estimate in 2015 and 2016.
“We think that gas prices have much more upside late this year, most of next year and beyond, than is priced into the strip and into equities,” says Rashid.
Although Rashid recently lowered his 2013 average gas price estimate to $3.88 per Mcf, he left his $5 projection for 2014 unchanged in the belief that fundamentals indicate a tight gas market. The lower 2013 estimate reflected some cooler regional weather, but a bigger factor was power generators’ need to burn off a “one-time” excess of coal inventory of about 23 million tons left over from the 2012-2013 heating season. Burning this coal instead of gas equates to 1.2 billion cubic feet (Bcf) of lost gas demand on an annualized basis, or 3.6 Bcf/d if concentrated into just June through September, as is likely.
“The extended winter helped get rid of the excess gas Btus, but we needed a fuller summer to get rid of the coal inventories as well,” he says.
In projecting a tight gas market next year—in the face of ongoing production gains from the low-cost supply basin of the Marcellus—Rashid models take-away capacity-constrained Marcellus production averaging 10.5 Bcf/d in 2014, up from 8.4 Bcf/d this year. In dry-gas basins, the rig count is assumed to be unchanged. Associated gas from liquids-rich plays is expected to continue growing but be roughly offset by the rise in exports to Mexico and the slide lower in imports from Canada. Total Lower 48 dry-gas supply, including net imports, is estimated at 69.3 Bcf/d, up 1% from 2013.
Read the entire article in the Spetember 2013 issue of Oil and Gas Investor.