Crystal Ball Gazing: Whither to for Natural Gas?

Record low prices marred natural gas in the past year. However, it has started making a comeback.

There were even fear mongers hawking their doomsday scenarios that storage would be full this autumn triggering a price collapse down to zero. Thankfully, that did not materialize. A swelteringly hot summer, A/C and a substantial increase in power burn.

Now the question remains: What’s next for Natural Gas?

Naturally (no pun intended) – we look to how Natural Gas will do in the upcoming winter.

Natural gas has had a notorious reputation for being a tough commodity to predict.

First of all the commodity is exclusively limited to North America and is susceptible to numerous unpredictable factors. Lately, it’s been price swings galore.

Let’s look at the factors shall we?

US rig count – This is a leading indicator. The must well known indicator, the Baker Hughes natural gas rig count, has been falling throughout the year. Now, it’s barely hitting 435 this week.

That’s a crazy year-to-date drop of 33%.

Yet natural gas production has remained strong. According to Bentek, production averaged 63.6 bcf/d this year, representing a +4%  increase over last year.

Strange isn’t it. What could be the reason underlying production’s increase despite the 33% drop in the natural gas rig count?

Well, you can start by blaming liquids-rich natural gas plays. For example, take a quick look at the Canadian Montney players; these guys hit anywhere from 6-10MMCF/D per well with associated liquids of 50-100+bbls/MMCF. In some cases, Condensate (also known as C5) makes up 80% of the associated liquids.


For these guys, the dry natural gas is simply a “by-product”. They don’t mind giving it away for free if they have to because the money is in the liquids. Did you know? In Alberta, Condensate is sold at a premium to oil in some cases as it is in high demand for blending bitumen and conventional heavy oil. (Heavy oil needs to be blended before it can be transported by pipe)

The natural gas market in the US may be coming back to balance this year rescued mainly by demand from power generation. Power generation demand increased 5 bcf/d in YoY since April. Storage levels are on track to start the winter heating season at around 3,950 BCF or roughly 7-8% above the 5 year average.

At this point, it?s simply a bet on the weather. Another unusually warm winter like last year will be devastating to both the commodity and the natural gas stocks. A cold winter will fuel a limited price rally in the next few months. By limited, I personally don?t see natural gas prices above $4/mcf in the US ? a lower ceiling for us Canadians on AECO.?Once the price crosses $4/mcf US, producers will be hedging like mad and the power burn demand would come in question.

In the near term, the easing of facility constraints in Pennsylvania will unlock the potential of 1,000 Marcellus wells or as much as 2 BCF/d in extra supply.

Another limiting factor would be natural gas production as a by-product of oil. This is masked by the number of rigs drilling for oil. Add to that increased production per well as seen in my Montney example and you got yourself a nice cocktail.

I believe that until export facilities are in place, the price of natural gas will remain hard to predict and with limited upside.

For those looking to bet on the weather by buying natural gas weighted stocks make sure you target the top tier companies. In Canada, Peyto, Tourmaline, Celtic, Trilogy and Paramount Resources would be an example. Avoid undervalued natural gas producers because there?s usually a tight noose around their neck: debt. Case in point, Waldron Energy WDN.TO 0.31 [+0.01] ? look at the chart, it says it all.

What do you think of NG prices? Which stocks would you pick for a trade?

Some of my buddies like CNQ – a tier 1 company. However, they’ll be waiting for a lower entry point. One to avoid would be PLT, which is collapsing due to NGL price collapses, production problems, DRIP fueled dividend etc.

Other ones to look out for?

TT.TO (Terra Energy) – Resolute Fund dumped 12 million shares lately and drove the price at 14 cents. The manager of the fund had bought at 2 $ few years ago. If it was not that fact, the pps would be much higher.
Hopefully TT.TO will sell some of its land in Oct. If it does, the debt will be paid off pretty quickly.

Another encouraging good sign is that Terra has 50,000 net acres adjacent to the very oily new CIOC Montney well which was discovered quite recently.

Still a gamble though: high risk for high reward. Their sales process seems to have been going on for over 8 months.

It doesnt mean it wont happen but I really find this odd. Hopefully a sale will finally go through for the sake of retail shareholders!

Canadian International Oil Company (CIOC): Talk of a big Montney well from CIOC / 4000 (!!!!) boepd (predominantly oil) at Karr/Gold Creek in and around T66R3W6. A high rate liquids rich well this far north in the basin would confirm that the liquids rich/oil window is continuous from Kakwa to Karr. For those not familiar with CIOC it?s a private company run by Bill Gallacher (Founder of Athabasaca).

RE.TO (Rock Energy) –  appears grossly undervalued and for anyone looking for deeply undervalued stocks RE would be on the top of the list. It has has good fundamentals ie not in distress or swimming in debt.

In fact, Jennings Capital released this below yesterday:

Rock Energy BUY

Analysts at Jennings Capital initiated coverage of Rock Energy with a BUY rating on Tuesday and a 12 month target price of $1.75.

However, the question to ask yourself is: how long are you willing to wait before the stock gets recognition? what is the market waiting for before it rewards the company with a higher valuations.