Natural gas prices continued to slide Friday – despite withdrawals out of storage meeting expectations for the first time in several weeks. It’s clear that a series of WELL above average withdrawals will be needed for natural gas prices to move higher.
With industrial demand still weak, this is unlikely. Even with some of the coldest weather in the key market areas of the NorthEast US in years, natural gas demand is not keeping up with supply.
BMO Nesbitt Burns echoed the major theme of my earlier posting on horizontal drilling (HD) in a research report earlier this week. HD is a new, low-cost drilling technology that results in greatly increased production out of some types of oil and gas formations – which greatly reduces costs.
BMO’s 130 page report went through each of the main shale gas plays in great detail, but they said that there were large areas in each of those plays where wells could make money at even US$4.50/mcf gas in the US, and CAD$4.50/mcf in Canada. Every well is different, but as I mentioned in my earlier article, shale gas is a very large amount of low-cost gas that is now available for North American consumers.
Even more bearish, BMO said – and all the industry knows this, not just them – that imports of Liquid Natural Gas could increase this year, because nobody else in the world may have the money to pay for it, despite natural gas prices being higher almost everywhere else in the world.
Lastly, their estimates for the amount of gas recoverable out of the new Canadian gas plays opening up – Horn River Basin and Montney Formation – were about half what my research had found.
It could be a long season of very low prices for many natural gas producers. Investors should be watching those with low debt ratios (none that I can find have net cash). Almost all of these natural gas weighted Canadian listed companies are going to trade lower. Only those with good growth of low cost HD production and low debt will be able to swim against the tide.
See the stock chart on HND:TSX – the ETF that trades against natural gas prices – the lower prices go, the higher the stock goes – it has gone from $28 – $47 a share in 3 weeks, on almost no volume. Likely this is because nobody thought gas would get this low and because the day trading retail crowd who play these ETFs want to spend that much $$$ per share.
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