An Expert from Sprott Is Confident That Natural Gas Prices Will Continue to Rise

 An Expert from Sprott Is Confident That Natural Gas Prices Will Continue to Rise

Hey there! The Canadian natural gas position and the future of numerous CBM gas producers and developers were discussed with Eric Nuttall, a research analyst at Sprott Asset Management. The price of spot natural gas has fallen nearly 15% since we last spoke. Storage of natural gas has increased by 423 billion cubic feet, reaching 2.5 trillion cubic feet, compared to a year before.

Almost all small-cap natural gas producers have taken a beating this year, according to Eric Nuttall. Their stock prices have been pummeling recently. On an adjusted share basis, there are companies whose production is expanding strongly, despite their stocks being down 40 percent year-to-date. What happens in the CBM and natural gas industries by year's end? The surplus of gas storage, in his opinion, will resolve itself.

How are coalbed methane producers being affected by the recent decline in natural gas prices?

Dear Eric Nuttall, This implies that the present drilling schedule for many CBM or shallow gas producers is probably not economically viable. They should postpone drilling until the prices of natural gas increase. So it shouldn't be shocking that we require this supply reaction to maintain a steady storage level balance.

With storage levels rebalancing, what are the best actions for investors to take, according to StockInterview?

Dear Eric Nuttall, For those with a medium to long-term perspective, I think now is a good time to start accumulating shares in both conventional and unconventional gas producers. Still, natural gas's long-term fundamentals are looking very bright. Declines of 20–40% year-to-date have been observed in numerous reputable names.

In your opinion, what are the gas industry's long-term fundamentals?

Dear Eric Nuttall, The production of natural gas in North America has been falling for a while now. Smaller, thinner, economically less viable, and more expensive to drill reservoirs and pools are contributing the most to incremental output. A natural gas well's first-year decline rate has increased from 12% to 50% in the previous five years. Additionally, the base decrease rate has quadrupled to about 25% to 30%. The size of the pool has also shrunk significantly during that period. Producing basins in the United States and Western Canada's Sedimentary Basin are both well-developed. For this reason, producers will only drill marginal wells if natural gas prices continue to rise.

Investing Interview: Furthermore, you anticipate that the decline in natural gas production will persist. I take it. So, that's the rationale behind the increased price of natural gas.

According to Eric Nuttall, conventional gas production has been on the downturn for a long time, whereas unconventional places like the Jonah Field, the Barnett Shale, and the Piceance Basin have been seeing a lot of development. In addition, the Barnett Shale and other growth assets have been in development for a while, and the wells' fast decline rate in the first few years means we'll have to work much harder to make up for lost ground. The diminishing base is so much greater that it is highly doubtful that the rise in unconventional gas can compensate for the fall in conventional gas during the next three years. North America's primary natural gas basins have reached maturity. The rates of decline are getting worse. The pool is getting smaller. The number of rigs is growing, but output remains stagnant, at best. My position on healthy natural gas pricing remains unchanged until there is a significant rise in LNG imports, which is not anticipated to happen for at least another four or five years.

StockInterview: You mentioned earlier that drilling was more costly.

Dear Eric Nuttall, There has been a 15% increase in the cost of onshore drillings and a 10% increase in operating costs over the last year. According to a recent Wall Street Journal report, the rate for rigs operating on extremely deep drilling platforms in the Gulf of Mexico has increased from $185,000 to as much as $520,000 per day. The platforms used for drilling have yet to depart the Gulf of Mexico. Rig availability is still a bit low in the Gulf of Mexico, despite the fact that many are departing for more promising regions, such the West African Coast. Moderating rig rate pricing is just now starting to show symptoms of emergence.

How might severe weather, such a storm, affect the price of natural gas? This is a question for StockInterview.

Dear Eric Nuttall, In the near future, natural gas and corresponding stocks might experience a significant spike. In order to address the issue of excess supply, it is nearly necessary to have a hurricane hit the Gulf producing area. At first, you will feel a positive emotional reaction. We will not know the longer-term impact until we evaluate the state of production platforms and sub-sea infrastructure.

Are investors supposed to be glued to the weather channel and prepared to call their stockbrokers, according to StockInterview?

Dear Eric Nuttall, It is now difficult to predict when to invest in natural gas. You should be thinking about the intermediate to far future. The next two months should be somewhat unpredictable. At this very moment, natural gas is dividing opinion. Companies will gradually ground their drilling rigs, reduce production guidance, and put a strain on their bank sheets, according to one camp, because of inflated storage levels. Then, in the autumn, when firms prepare their 2007 budgets, they will present investors with production growth profiles that moderate and take advantage of low gas prices.

Interview with Stock: What does the opposing side have to say?

Dear Eric Nuttall, Present and future storage levels are already discounted by the natural gas strip, according to another camp. Also, when looking at price-to-cash flow and price-to-net asset value ratios, equities are cheap, thus now is a good time to buy. This is the position I'm leaning toward. I will concede, though, that until the fall—barring a major hurricane—it's more probable than not that the stock market will move sideways rather than in a straight line.

During our conversation with an equities strategist, we learned that he predicted a possible upward trend in natural gas stock prices sometime in August.

According to Eric Nuttall, small cap natural gas stocks may remain flat for at least another month or two. Concerns about a large-scale laying down of rigs, forced well shut-ins, and overleveraged balance sheets should have diminished by the end of August, when we should have experienced a demand and supply reaction. Instead of focusing on spot prices—which are now hovering around $9.00 for the coming winter and $8.00 for next summer—investors will start to pay more attention to the natural gas strip.

StockInterview: Until that point, though?

Dear Eric Nuttall, As a whole, I expect the large caps to do better until then. Following Anadarko's massive $22 billion all-cash buyout of Western Gas and Kerr-McGee, they have lately been attracting bids and are more oil-focused. Western Gas was mostly composed of tight gas in Wyoming and coalbed methane in the Powder River Basin. Importantly for investors in unconventional gas, Anadarko paid approximately $2.00 per 3P (Possible) Mcf, which is a very healthy price. The fact that Anadarko sees solid natural gas fundamentals over the long haul is evident in this. There was probably a bottom in the big caps due to these all-cash deals.

StockInterview: What are your thoughts on the local gas firms that aren't as well-known?

Dear Eric Nuttall, In this year, almost every small-cap natural gas producer has taken a beating. Their stock prices have been pummeling recently. These days, you can find several corporations whose stock prices are down 40% so far this year. On a per-share adjusted basis, they are still seeing robust output growth. However, their 2007 cash flow is only 2.5 times what they are trading for now. There are a lot of equities that have dropped in price. Despite the fact that the market may remain a little sloppy for the next several months, I believe that patient investors can still find some fantastic bargains.



StockInterview: In your opinion, what is the current state of the natural gas equity market?

Dear Eric Nuttall, There are a lot of natural gas weighted companies that are quite inexpensive right now. Companies that have active drilling operations, sufficient funding, and highly promising land are trading at a discount to their 2007 cash flow. I anticipate that many trusts and seniors will seize the chance to acquire existing production at a discount to what exploration or development drilling would cost at the present time if junior stock prices do not rise.

Investing Interview: Take a look back at Crew Energy, Rockyview Energy, and Canadian Spirit, a few of the more risky businesses we discussed in the spring. Is your opinion of them now changing?

According to Eric Nuttall, Crew (TSX: CR) is an excellently managed firm that specializes in natural gas. They have a highly active drilling program for the second half of the year and are planning to increase output per share by more than 40% this year. Nothing has changed other than the price of natural gas, notwithstanding the halving of Canadian Spirit Resources' (TSX: SPI) value from its peak. We continue to have a strong belief in Canadian Spirit. I believe they have the makings of a very successful initiative if they can maintain their past rates of growth, even though they are still in the early phases of their play and there are still production and economic risks. Recent cuts of 67% to drilling capital expenditures by Rockyview (TSX: RVE) dragged down the story's short-term momentum. Assuming the price of natural gas recovers, the stock should rise again.


StockInterview: Which startups are you keeping an eye on that aren't like the norm?

Dear Eric Nuttall, We are keeping a close eye on EnCana's (NYSE: ECA; Toronto: ECA) drilling activities in Washington State's Columbia River Basin. Investors seeking exposure to natural gas with a reduced risk and comparatively lesser return can consider EnCana. In 2007, they hedged around 95% of their natural gas at a little over $7/mcf, thus they are shielded from the brutalized market price of today. Similarly, Calfrac (TSX: CFW) is trading at 10 times 2007 earnings expectations, having fallen 45% from its peak. Their stock should do well whenever natural gas prices rise, since they are highly dependent on CBM.

Investing Interview: Ember, Real Resources, and Pacific Asia China Energy were among the others we discussed. Have there been any developments?

This is Eric Nuttall reporting on the devastating loss suffered by Ember Resources (TSX: EBR). For the remainder of the year, they will be actively pursuing a drilling program. They should look at additional equity financing options to cover the costs. An overhang on the stock price has resulted from this. The short-term strength of the stock can be hindered until they can secure a funding. Execution of Real Resources' (TSX: RER) drilling program has been commendable. Production is expected to increase by 37% to 16,500 Boe/d after a pipeline is finished in the next month. The corporation owns 450,000 net undeveloped acres that could be used for a number of projects, according to Sproule's assessment. These include the Devonian Nisku, 190 light oil sites in the Bakken, and as much as 1.1 Tcf of recoverable CBM. This company is a great buy at its current price of 3.5 times 2007 cashflow. Expectedly, results from three core drills were recently disclosed by Pacific China Asia Energy (TSX: PCE), showing gas concentrations and seam thicknesses that were quite good. Only by drilling test wells can you determine if wells will produce at an economic rate, which is an ongoing question. Either later this year or early next is when I believe that is planned. They seem to be sitting on some pretty promising ground; all they need is some time to drill and see whether they can get economic rates across their property.

StockInterview: In the short term, what are your predictions?

Dear Eric Nuttall, A lot of people were anticipating that hurricanes or warm weather would help burn off the surplus supply, but neither of those things have happened yet this summer. It seems like we'll end the natural gas injection season with a 10% improvement compared to last year. Natural gas costs are projected to stay below $6.50 until fall, barring extreme weather events like hurricanes or heat waves. Over the summer and into the fall, natural gas stockpiles are expected to remain very unpredictable and without obvious direction, barring a particularly intense heat wave or a major hurricane. Natural gas spot prices aren't going to get much attention until the fall, around September or October, when winter strip pricing—which is still more than C$10—does. The stock market, in my opinion, will remain bewildered until that time arrives. Opportunities to acquire companies with top-notch management for below-average multiples, as defined by price-to-cash flow, are present in the market at the moment.

Investing Interview: Do you still see hope in the CBM sector, or have you written it off?

Dear Eric Nuttall, Natural gas is, without a shadow of a question, a fantastic long-term investment. Similar to light oil, we have reached the limit of our capacity to significantly enhance output. Increasing the long-term supply of natural gas, in my opinion, requires incentivizing producers to drill wells with ever-decreasing economic returns. The price of natural gas has to go up for that to happen. In Canada, coalbed methane is one of the few natural gas production growth opportunities that has persisted. The economics are quite difficult with the present gas prices. Raise gas pricing to persuade coalbed methane producers to respond with more supply. If investors want to profit from the current gas storage oversupply, they should wait for natural gas equities to respond to the inevitable correction.

Location:

Share :