Natural Gas Environment Still Weak - Analyst Blog
February 27 2012 - 11:39AM
Zacks
The U.S. Energy Department's weekly inventory release showed a
larger-than-expected drop in natural gas supplies, as production
remained flat and pipeline imports from Canada declined. However,
this is largely seen as a one-off shot, with warmer-than-normal
temperatures across most of the country restricting the commodity’s
requirement for power burn.
In fact, gas stocks – currently 40% above benchmark levels – are
at their highest point for this time of the year, reflecting low
demand amid robust onshore output.
The Weekly Natural Gas Storage Report – brought out by the
Energy Information Administration (EIA) every Thursday since 2002 –
includes updates on natural gas market prices, the latest storage
level estimates, recent weather data and other market activities or
events.
The report provides an overview of the level of reserves and
their movements, thereby helping investors understand the
demand/supply dynamics of natural gas.
It is an indicator of current gas prices and volatility that
affect businesses of natural gas-weighted companies and related
support plays like Anadarko Petroleum Corporation
(APC), Chesapeake Energy (CHK), Encana
Corporation (ECA), Devon Energy
Corporation (DVN), Nabors Industries
(NBR), Patterson-UTI Energy (PTEN),
Helmerich & Payne (HP) and Halliburton
Company (HAL).
Stockpiles held in underground storage in the lower 48 states
fell by 166 billion cubic feet (Bcf) for the week ended February
17, 2012, above the guidance range (of 160–164 Bcf draw) as per the
analysts surveyed by Platts, the energy information arm of
McGraw-Hill Companies Inc (MHP).
The decrease – the thirteenth consecutive withdrawal of the
2011-2012 winter heating season after stocks hit an all-time high
in mid-November – is also higher than last year’s draw of 102 Bcf
and the 5-year (2007–2011) average drawdown of 145 Bcf for the
reported week.
However, notwithstanding the healthy shrinkage during the past
week, the current storage level – at 2.595 trillion cubic feet
(Tcf) – is up 753 Bcf (40.9%) from last year and 744 Bcf (40.2%)
over the five-year average. With this huge natural gas surplus,
inventories in underground storage are likely to end the winter
close to their highest level of 2.1 Tcf set in 1983.
A supply glut has pressured natural gas prices during the past
year or so, as production from dense rock formations (shale) –
through novel techniques of horizontal drilling and hydraulic
fracturing – remain robust, thereby overwhelming demand.
As a matter of fact, natural gas prices have dropped some 47%
from 2011 peak of about $5.00 per million Btu (MMBtu) in June to
the current level of around $2.65 (referring to spot prices at the
Henry Hub, the benchmark supply point in Louisiana). Incidentally,
prices hit a 10-year low of $2.23 in late January.
To make matters worse, mild winter weather across most of the
country has curbed natural gas demand for heating, indicating a
grossly oversupplied market that continues to pressure commodity
prices in the backdrop of sustained strong production.
This has forced several natural gas players to announce
drilling/volume curtailments. Exploration and production outfits
like Ultra Petroleum Corp. (UPL), Talisman
Energy Inc. (TLM) and Encana have all reduced their 2012
capital budget to minimize investments in development drilling.
On the other hand, Oklahoma-based Chesapeake – the
second-largest U.S. producer of natural gas behind Exxon
Mobil Corp. (XOM) – has opted for production shut-ins to
cope with the weak environment for natural gas that is likely to
prevail during the year.
However, we feel these planned reductions will not be enough to
balance out the massive natural gas supply/demand disparity and
therefore we do not expect much upside in gas prices in the near
term. In other words, there appears no reason to believe that the
supply overhang will subside and natural gas will be out of the
dumpster in 2012.
ANADARKO PETROL (APC): Free Stock Analysis Report
CHESAPEAKE ENGY (CHK): Free Stock Analysis Report
DEVON ENERGY (DVN): Free Stock Analysis Report
ENCANA CORP (ECA): Free Stock Analysis Report
HALLIBURTON CO (HAL): Free Stock Analysis Report
HELMERICH&PAYNE (HP): Free Stock Analysis Report
MCGRAW-HILL COS (MHP): Free Stock Analysis Report
NABORS IND (NBR): Free Stock Analysis Report
PATTERSON-UTI (PTEN): Free Stock Analysis Report
TALISMAN ENERGY (TLM): Free Stock Analysis Report
ULTRA PETRO CP (UPL): Free Stock Analysis Report
EXXON MOBIL CRP (XOM): Free Stock Analysis Report
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