Natural Gas: No Relief in Sight from Low Prices

Written by John Egan for Industrial Info Resources (Sugar Land, Texas)--For natural gas producers, this summer has become a bummer: soaring production, pipeline constraints and weak demand growth have combined to keep prices low. Current low prices are expected to rise only moderately over the next 18-24 months, according to investors buying gas futures on the New York Mercantile Exchange (NYMEX), as well as the U.S. Energy Information Administration (EIA) (Washington, D.C.).

Spot gas prices at the Henry Hub averaged $2.78 per million British thermal units (Btu) in June, a 7-cent decrease from May. For July, Henry Hub prices moved up slightly to an average of $2.84 per million Btu, according to EIA's most recent Short Term Energy Outlook (STEO), released August 11. EIA doesn't see Henry Hub prices exceeding $3 per million Btu for the rest of the year. The August STEO forecast Henry Hub prices will average $2.89 per million Btu for all of 2015, an 8-cent decline from the prior month's STEO forecast.

With each passing month this year, EIA's gas price forecasts turn more pessimistic. In its January 2015 STEO, the agency predicted gas prices at Henry Hub would average $3.44 per million Btu this year. Year to date, EIA's average 2015 price forecast for natural gas has fallen by 55 cents per million Btu. By contrast, 2014 was a relatively good year, when Henry Hub prices averaged $4.12 per million Btu.

Click on the image at right to see EIA's historic prices for spot gas at the Henry Hub, and for its predictions for 2015 and 2016 prices.

Investors seem to share EIA's outlook for gas prices. Gas futures traded on the NYMEX show only modest gains during the next 24 months, approaching $3.50 per million Btu in early 2017 before slumping to about $3 per million Btu in mid-2017.

Click the image at right to see gas futures prices on the NYMEX.

The Henry Hub price is used as an index to price gas at other hubs across the country. While producers in many hubs are receiving close to Henry Hub prices for their product, producers in the Marcellus Shale are receiving substantially less: In the Leidy Hub in Clinton County, Pennsylvania, a hub for Marcellus gas, producers have consistently received at least $1 per million Btu less for their gas compared to Henry Hub prices. This summer, prices at Leidy Hub have fallen under $1.25 per million Btu on some recent days. There are several reasons for the deep discount: insufficient demand, surging production, and a lack of pipeline infrastructure to get the gas out of the region and into the national pipeline system.

Low gas prices in the Marcellus Shale is a big reason why producers like Cabot Oil & Gas Corporation (NYSE:COG) (Houston, Texas), Range Resources Corporation (NYSE:RRC) (Fort Worth, Texas) and EQT Corporation (NYSE:EQT) (Pittsburgh, Pennsylvania), some of the leading producers in the Marcellus, reported such weak second-quarter results. Range reported a net loss of $118.6 million in the just-completed second quarter. Cabot reported a net loss of $14 million in the second quarter. For more on Cabot's results, see July 27, 2015, article - Cabot Oil & Gas Swings into Second-Quarter Loss on Natural Gas Prices, Maintains $900 Million Capex for 2015.

During Cabot's second-quarter earnings call, the Pittsburgh Tribune-Review quoted Chief Executive Dan Dinges: "I have been in this business over 30 years. I've seen a lot of cycles, and this is one of those draconian, down markets."

"The realized price they're getting, that's just ugly," Stewart Glickman, an energy analyst at Standard & Poor's, told the newspaper in late July after second-quarter earnings plunged 95% for EQT. "It's a rough market to be in if you're trying to sell natural gas these days." Prolonged low prices for gas in the Marcellus Shale has made Glickman more interested in hearing about potential mergers and acquisitions. Investment bank Goldman Sachs (NYSE:GS) (New York, New York) reportedly identified Range and Cabot as companies that could be vulnerable to takeover offers.

Despite low prices, producers in the Marcellus and other formations have increased production as they utilize new techniques and technologies. The EIA's monthly Drilling Productivity Reports show new gas wells drilled in the Marcellus, Eagle Ford, Niobrara and Haynesville shales are all higher rates in initial production (IP) than wells drilled a year or more ago. For more on that issue, see July 16, 2015, article - Efficiency Gains Keep Oil & Gas Production Rising in the Face of Lower Prices.

Commenting on companies in the Marcellus, S&P's Glickman told the Pittsburgh Tribune-Review, "it wouldn't surprise me if some of these players decide to tap the brakes a bit on production growth, at least through 2016. Why go full blast and use up your asset base in this environment?"

According to the EIA, residential and commercial gas consumption is expected to decline modestly this year and next. Modest consumption gains from industrial users, and strong demand growth from electricity generators, will push average daily gas consumption to 76.55 billion cubic feet per day (Bcf/d) this year, a 4% gain from 2014's consumption of about 73.48 Bcf/d. But in 2016, EIA sees total gas use declining modestly, to 76.44 Bcf/d.

Prospects that liquefied natural (LNG) gas export terminals could drive domestic gas consumption higher have faded as LNG prices have plummeted in overseas markets, notably Asia. LNG prices in Japan have fallen to less than $9 per million Btu, the lowest price since September 2009, Reuters reported. As that country brings its nuclear plants back online, it has reduced its need for imported LNG to generate electricity. Japan closed its nuclear generators in the aftermath of the Fukushima Dai'ichi nuclear accident in March 2011.

"Basic economics tells you that when there's too much supply, prices will fall, so the easiest way to increase prices would be to lower production," said Jesus Davis, Industrial Info's vice president of research for Oil & Gas Production, Pipelines and Terminals. "Chesapeake Energy tried that a few years ago, but prices firmed only temporarily. The 'X' factor for producers is the efficiency gains coming from new drilling techniques and learning-curve benefits. Those are lowering the break-even point for many drillers, but no one's making money with gas priced at $1.25 in the Marcellus."

Industrial Info Resources (IIR), with global headquarters in Sugar Land, Texas, five offices in North America and ten international offices, is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. Industrial Info's quality-assurance philosophy, the Living Forward Reporting Principle™, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities.