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Research Reports Gives a $0.00 (ZERO) Target for Natural Gas stock

I have never before seen a research report from a brokerage firm with a target price of $0.00, but that’s what Calgary based oil and gas specialist Peters & Co. calls for Sabretooth Energy (SAB-TSX; $0.38).

A combination of debt, low production from new wells and low commodity prices made for the call. The company has been actively trying to reduce debt by selling off assets over the last year.  They also got creative in financing by taking control of a publicly traded company – a junior capital pool company – called HFG, symbol HFG:TSXV – and raising money via that vehicle.

But it wasn’t enough to convince one analyst.

BULLISH SIGNS

Oil has once again jumped above $40/barrel, and several junior/intermediate oil stocks in Canada – the 20 or so companies that most research analysts in Canada follow – were almost all up. It’s amazing to see some of the bounces these stocks can have – many were up 6-12%.  Any light of hope gives the higher quality junior and intermediate stocks a jump right now.

For once, oil inventories did not go up by more than was expected.  Investors chose to ignore there are 17.5 million more barrels this year in storage than last year.  They saw a drop in gasoline stocks, due to increased demand, as a sign the bottom may be in for oil.  Also, oil usage in the US is down less than 1% over this time last year, which I think is truly bullish.

On the gas side, industry analysts and managements are telling people the rig counts are down dramatically, and they are, and that will end low prices at some time in the future.  Even though rig counts are way down, the horizontal rig count is just starting its cliff dive now, which is the one that to me, really counts. 

JUST HOW CHEAP IS NATURAL GAS RIGHT NOW?

I suspect few retail investors understand just how cheap natural gas is in the US right now.  Most of us only see the NYMEX gas price for the US, or the Henry Hub in Louisiana, and the AECO price out of Edmonton for Canada.  But there are many “hubs” from which natural gas is sold, and they each have different prices – just like the same car in New York City is a different price than in rural Idaho.

Check out some of the current prices from various hubs:

US$2.85/mcf      Permian Hub on Texas/New Mexico

US$2.75               San Juan hub, northern New Mexico

US$2.71               Opal Hub, southern Wyoming

US$3.31               Topock Hub, Nevada

All the hubs east of the Mississippi are above $4/mcf, with the highest being Boston at US$5.23.  But the US Midwest and even in California are awash in low price gas.  Very few if any companies are producing gas at a profit at those prices.

Only time will tell how long it takes these lower rig counts to translate into lower gas production. With so many of the new wells being horizontal which provide 400%-700% more gas than vertical wells, it could be longer than most people think.

  

Day rates for rigs are also dropping; it’s likely the entire cost structure of the Western Canadian Sedimentary Basin (and US gas as well) will be reset lower over the next year.  Drilling companies are already being hard hit, with stock prices plummeting as investors digest that this means lower margins and lower rigs.  Lower costs means that more rigs – and more gas – can come back on stream at a lower price than previously thought –another cap on the long term price.



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