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Natural
Gas keeps burning
By: Allen Gibson
Higher demand. Stagnant supply. Strained delivery systems.
Sounds like a recipe for profits, doesn’t it?
Well, that’s exactly the situation that natural gas
is in today.
To get there, however, it will be necessary to develop
more domestic supply, increase the production from ‘unconventional’ gas
sources like coal-bed methane, increase pipeline capacity from Canada and
Alaska, and build new LNG (liquefied natural gas) terminals. For the
foreseeable future, therefor, the opportunities for domestic gas producers
are excellent.
The price of natural gas means opportunity.
The price of natural gas, like the price of oil, is
both volatile and tremendously difficult to predict. Having said that,
certain trends are irrefutable. During the 90’s, the price of gas remained
low and steady, largely due to a glut of supply. In 1999, the benchmark
price of natural gas on the New York Mercantile Exchange averaged $2.32 US /
million British thermal units (MmBtu). That was less than half the average
price of $5.49 last year. The supply glut is now history, and our
international supply chain doesn’t have a lot of excess capacity.
With natural gas demand in North America increasing at
about 3 % per year and supply increasing at only around 1%, the price of gas
is high and most analysts say it will remain high for the next three to four
years.
Traditionally, oil and gas stocks have been thought of
as good stocks to rent, not to own. The price volatility and cash-flow
fluctuations inherent in the industry put off many longer-term buy-and-hold
players, like mutual funds and pension funds. This way of thinking probably
won’t go away. But the long-term fundamentals favoring higher natural gas
prices are so convincing that it may explain why a quick glance at the Bull
Sector natural gas list (www.bullsector.com/naturalgas.html)
will show you that most natural gas stock prices are rising. Recent
announcements by the International Energy Agency have also boosted energy
stocks. The Agency has raised its estimates for global oil demand for six
straight months this year.
Of course there are significant risks to owning
natural gas stocks. Unusual weather or an economic slowdown could cut
demand. Environmental regulator’s relaxation of the pollution control
rules for coal-fired power plants, mean more electricity is starting to be
produced from coal as opposed to natural gas. And if the U.S. government
decided to open up lots of federal land to natural gas drilling? These
things could throw the bullish scenario for natural gas off track. More
likely, though, any volatility in share prices will just give patient,
long-term investors decent entry points into natural gas stocks.
When oil prices fall it puts downward pressure on gas.
But many factors suggest that oil prices will remain high. Donald Coxe of
Harris Investment Management goes so far as to say “The era of cheap oil
is dead. Learn to live with that – both in your driving and in your
investing.” He notes that the refinery system is stretched thin, OPEC has
no meaningful over-capacity anymore, and China has gone from being a major
oil exporter to a huge importer with consumption second only to the U.S.!
Unconventional Production Becomes the Largest Source of U.S. Supply
Gas production in the lower 48 is slowly but surely
declining. Even the application of new technology over the past decade has
not reversed the decline. Some of the reasons for this are political: much
of the untapped reserves thought to exist are on federal lands that are
restricted from drilling. And the biggest untapped reserves – those on
Alaska’s north slope – are also restricted, and likely to remain so for
environmental and other reasons. Not only that, but Alaska needs a new
pipeline to be built to deliver its gas to the lower 48, and that pipeline
is years away from completion. In order to meet the growing demand, other
sources of supply must now be developed.
According to the EIA, natural gas production from
‘unconventional’ sources such as tight sands, shale, and coalbed
methane is projected to increase rapidly to eventually account for almost
half of all production. Already coal bed methane accounts for about 7.5
percent of production nationwide, a number that is projected to go sharply
higher over the next few years, since exploration costs for coal bed methane
are typically low and its shallow wells are cost-effective to drill compared
to traditional deep gas wells.
This is good news for coalbed methane-oriented
companies like Heartland Oil and Gas (HOGC) whom have recently begun
drilling programs to take advantage of the current excellent market
economics.
Heartland Oil and Gas recently raised 12 million
dollars, and in March started spending a planned 5 million drilling on its
enviable land position in the Forest City Basin in Kansas. The company has a
100 percent working interest in almost a quarter million acres in the basin,
most of which was acquired before the current surge in interest pushed up
leasing costs dramatically.
LNG – Liquefied Natural Gas
Another source of supply looking to expand is
Liquefied Natural Gas.
LNG imports are projected to increase from current
levels of about 2 percent of consumption to more than 8 percent within six
years.
The world market for LNG is heating up rapidly, and in
order to get more LNG supplies the US needs to build more terminals to
receive the shipments. There are currently only four receiving terminals in
the country, and some predict at least twelve will be needed to make a dent
in the supply problem. Several companies are currently in the approvals
process to begin constructing the needed terminals and regasification
plants.
Production and consumption are increasing globally,
with three countries – Egypt, Norway, and Russia –poised to become LNG
exporting countries. At least seven additional countries are in the planning
stages for their first LNG liquefaction plants. And China is building its
first LNG receiving terminal after signing a $13 Billion contract with
Australia to supply the gas. To meet the growing demand, enough new LNG
tankers are being built to increase the total shipment capacity by 44%!
Is it a good time to buy?
A recent report from Bear Stearns titled "The
'Other' Energy Crisis," had this to say: "The tide has finally
turned," according to analysts Ellen Hannan, John Kang, and Scott Burk.
"The maturing of the gas-producing basins in North America, combined
with a market that has grown by more than 25 percent over the past fifteen
years, finds the industry in a difficult position to continue to provide a
source of cheap, abundant energy." They predict gas prices of $4.25 to
$5.50 for the next two years.
The analysts also note that the sector is only trading
"at the low end of historical ranges" at about 3.7 times cash
flows.
“I see natural gas trading for an average of $5 over
the next three years, inside a range of about $4-$6,” says industry expert
Rikard Ekstrand of First Pacific Advisors.
So is it a good time to get into natural gas stocks? The consensus would
seem to be: “You Betcha.”
Allen R. Gibson has over twenty-five years of experience in media and
Corporate communications. He has been a reporter, television producer, and Marketing communications consultant for public companies in both the US
and Canada.
Disclaimer:
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InvestorIdeas 2004
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