Thursday, April 12, 2012

Houston, We have a natural gas price problem!

While oil E&P players here in Houston are optimistic, those in the shale and natural gas businesses have a bit of a worry - for the first time since January 2002, a front-month settlement for natural gas has closed below US$2 on the NYMEX overnight.

The execution in question was for a May delivery which settled at US$1.984 per million Btu, down 2.3% or 4.7 cents, and it has caused a stir down here since majority of players, including independents are involved in both sets of prospection activity.

The reason is simple – there’s just too much of the stuff around, especially in a North American context courtesy shale gas plays which have been resulting in an exponential rise in US production. A relatively mild winter stateside and an abundance of supply has already caused natural gas prices to plummet over 50% on an annualised basis.

Can they plummet further over the next two quarters? Possibly. Will they? Probably not; that’s because the trading community will also take stock of the new low. The price is low enough as it is, but is there an appetite for further bearish punts? Regrettably, the Oilholic has not encountered definitive reasons one way or another. In fact, an unscientific straw poll of five Houston based traders had three anticipating a further fall while two said a temporary bottom had been reached.

Without a shadow of doubt though, over the course of the year, companies with a higher proportion of their production equation leaning towards natural gas will be more at profit risk on a basis relative to their peers having a greater exposure to oil production. Expect a scaling back of budgets or a sale of assets in order to manage leverage ratios by such players.

Coupled with all this is an interesting and somewhat related note on US midstream companies put out by Moody’s on April 2, 2012 which notes that booming demand for new oil and natural gas liquids infrastructure trumps weak natural gas prices. The agency reckons that a robust environment for US midstream energy companies will continue through mid-2013 and possibly beyond and forecasts that EBITDA for the midstream sector will grow by more than 20% in 2012.

Growing production of oil, natural gas and natural gas liquids and higher margins are driving increased earnings and cash flow for midstream companies, especially those with existing gathering and processing or pipeline infrastructure near booming shale plays. The agency names Energy Transfer Partners, Enterprise Production Partners, ONEOK Partners and Williams Partners among those best positioned for organic growth.

In addition, Moody's says that low interest rates and the sector's lower commodity price sensitivity have made the midstream sector very attractive to equity investors, while both high-yield and investment grade midstream companies are able to tap the open capital markets for funding to fuel growth.

Moving away from ‘gassy’ issues and onto the price of the crude stuff, WTI maintained its mildly bullish thrust trading over US$103 per barrel at one point in intraday trading on Thursday aided by a weaker US dollar while Brent was seen more or less holding steady at price levels above US$120 per barrel.

That’s all for the moment folks! The Oilholic leaves you with views (above) of the Christopher C. Kraft Mission Control Center building and its mission control room at NASA’s Johnson Space Center which yours truly took time out to visit this afternoon. While crude oil markets have “lift off”, the natural gas markets have a “problem.” Keep reading, keep it ‘crude’!

© Gaurav Sharma 2012. Photo 1: Downtown Houston, Photo 2: Mission control room and exterior of the Christopher C. Kraft Mission Control Center building at NASA’s Johnson Space Center, Texas, USA © Gaurav Sharma 2012.

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