?Several factors have recently converged, making the outlook for U.S. natural gas pricing more attractive heading into this summer. For one thing, during the final 70 days of this past winter, colder weather generated nearly 400 billion cubic feet (Bcf)—or greater than 5 Bcf daily—more gas demand than the 10-year average, reports Raymond James & Associates in Houston.
Thus, instead of ending first-quarter 2008 with a very bearish 1.65 trillion cubic feet (Tcf) of gas in storage, the U.S. saw winter end with a more normal 1.25 Tcf in storage. Meanwhile, during the first quarter of the year, gas prices ticked up from $8 to more than $10 per thousand cubic feet (Mcf).
The bottom line: With lower storage levels, the outlook for gas prices this summer has improved substantially, causing Raymond James to raise its 2008 gas-price forecast from $6.50 to $8 per Mcf.
That’s not all. Joseph Allman, an analyst with JPMorgan Securities in Houston, indicates that liquefied natural gas (LNG) imports, although they make up only 3% of total U.S. gas supply, are likely to be lower in 2008 than was the case in prior years. He estimates that daily LNG imports this year through early April 2008 averaged 920 million cubic feet versus a five-year average of about 1.6 Bcf and last year’s average of about 2.35 million for the like period.
“So far this year, LNG (import) data certainly is supportive of (domestic) natural gas prices,” he says. “If items like LNG continue to track below average and below last year, the gas market may be tighter than we have modeled.”
The reason for lower LNG imports? Allman notes that in Europe, the lack of precipitation in Spain has caused that country to increase average daily LNG imports since year-end 2007 by about 500 million cubic feet, compared with prior-year and three-year averages.
“Given the current hydroelectric water levels and lack of meaningful forecast precipitation, Spain likely will continue demanding well-above-average LNG which should be bullish for U.S. natural gas prices and the E&Ps.”
Other factors influencing lower U.S. LNG imports, he says, are colder winter weather, secular global gas-demand growth, liquefaction-plant problems and the still-down Kashiwasaki-Kariwa nuclear facility in Japan.
Also, in early April, a leak in the Independence Trail export pipeline caused Independence Hub, which was producing between 850 and 900 million cubic feet of gas per day in the ultra-deepwater region of the eastern Gulf of Mexico, to shut down. This event could negatively affect gas supply anywhere from a few days to a few months, especially for Anadarko Petroleum Corp., which owns 61% of the hub’s capacity.
“Clearly, most (other) E&Ps benefit from the rise in the price of natural gas due to this incident,” says the analyst, particularly the least hedged producers.
Within JPMorgan’s coverage universe, overweight-rated large-cap producers that have the most unhedged North American gas production are EOG Resources and XTO Energy; among the midcaps, Petrohawk Energy and Range Resources; among the small-caps, Gasco Energy, Penn Virginia and McMoRan Exploration.
Overall, JPMorgan is bullish on the E&P group based on supportive fundamentals and valuation, adds Allman. “Supportive factors include declining service costs, improving field-level efficiencies and balanced-to-tight commodity markets. The E&P stocks tend to do well when cash margins and rates of return are improving, and that trend continues for the group.”
No small beneficiary of rising gas prices also will be Denver’s Forest Oil. On April 1, it announced a new gas discovery in the Utica shale in the St. Lawrence Lowlands in Quebec, and the purchase of properties in its Ark-La-Tex core areas for $285 million.
“Forest estimates its Utica shale acreage could hold 4 Tcf equivalent (Tcfe) of resource potential,” says Larry Busnardo, an analyst with Tristone Capital in Denver.
Updating its companywide project inventory, Forest also indicated it has identified about 15,000 drilling locations, up from a previous estimate of 5,330, with net unrisked resource potential increasing to 10 Tcfe from 2.8 Tcfe, adds Busnardo. “We now have an Outperform rating on the stock with a 12-month target price of $70.”