Montreal based securities firm National Bank Financial lowered their 2009 price outlook for oil and gas, down to US$50 per barrel for oil and US$5 gas.  Sell side analysts are slowly but steadily reducing their price deck to more current, and what I consider more realistic levels – hence the analogy of falling like dominoes.  Calgary based Tristone Capital did the same last week, turning very bearish on gas (which we discussed in an earlier post).

(By the way, sell side=those analysts who are employed by brokerage firms, who SELL their research. Buy side=institutions/fund managers/pension funds who BUY their research (via commissions))

The Energy Information Agency (EIA) in the US is considered the definitive statistical body for oil and gas globally.  They regularly come out with historical stats and forward looking “guesses” (because that’s all they are folks; don’t give them TOO much credence-they end up changing their mind A LOT) on energy prices. This week they told the world they expect US GDP to reduce by 2.9%, and all fuel prices will decrease because of this.  Oil immediately dropped $4 a barrel (Tuesday) and gas prices also fell.

It has taken a couple days for the analysts to digest all these new forecasts and revise their own – downward.

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Natural gas withdrawals from inventory did not meet expectations again this week (159 bcf vs 165 bcf – billion cubic feet), despite this being the coldest winter in at least five years.  Again, industrial demand is down significantly – but considering that, 159 bcf is actually a heavy withdrawal.

Storage is currently at 2020 bcf, 43 bcf greater than last year and 24 bcf higher than the five year average.

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Vero Energy (VRO-TSX) issued their 2008 reserve report today.  I respect this company a lot – their per share growth in production over the last 3 years has been excellent, and they are one of the lowest cost natural gas producers in North America.  Proven reserves were up 85%, which is all low-cost gas that can be accessed by horizontal drilling.

Most of the quality gas producers in Canada are reporting big increases in reserves so far this year – I mentioned Storm Exploration (SEO-TSX) in an earlier story on this topic.  Vero and Storm and the many other producers now using horizontal drilling on huge new plays are proving our thesis that an astronomical amount of low cost gas is now being found and booked as reserves – which will keep gas prices low for years.  However, I see a trend where these reserves are being booked at prices – set by independent consulting firms – that are now well above the market, and in my opinion not truly reflective of the current market. 

I only use Vero as an example of the whole industry.  Because of high energy prices most of 2008, the independent consultants who are hired to do the year end reserve calculations are using prices that are now WAY higher than what the market is now and higher than what they will be, realistically, for at least the next couple years. Vero’s consultants used CAD$7.90 gas and CAD$67.24 gas, which at the current US$-CAD$ exchange rate puts oil at roughly US$54.

Reserves are the assets that companies borrow money against.  These companies now have the potential to be borrowing against inflated asset values – from an independent source – that are not indicative of the current market.  Does that sound familiar to anyone?

To be fair, if those prices end up being average over the 11 year life of the assets, then it’s OK, and nobody can tell what the prices will be like 2 years from now much less 11.

Vero to me represents the epitomy of the quandary we have as investors.  Great management.  Great low cost properties. And if I’m wrong and the gas price turns up, Vero would be one of the very first stocks I would buy.  But I think natural gas prices are going lower and staying lower for the rest of this year and maybe much of next year.

Some readers are wondering when they are going to see a sample company report.  I will only publish on a company I would own myself that day, and I have not been in any rush as few listed TSX energy stocks are a buy yet.  However I have narrowed the list and hope to publish before the end of the month.  Meantime, I am enjoying the traffic and feedback from readers, and writing the articles.  Please keep the feedback coming.

ANOTHER SIGN OF THE GROWING IMPORTANCE OF HORIZONTAL DRILLING

The Good News: Hope is Leaving the Natural Gas Market

In the last few days I have read two major investment groups in the natural gas market put off any hope of recovery in the natural gas price until at least next year, and maybe even 2011-12.

And yes, this is very good news for investors.  Because these stocks can’t start to go up until all hope is gone. Until the valuations of these companies price in much lower gas than what analysts have been using in their models, natural gas companies are what I call zombie stocks – walking dead men.  Right now growth is not being rewarded in Canadian listed energy stocks.  The quicker we hit bottom (unfortunately still several months away) the quicker investors can comfortably buy natural gas stocks again knowing that as production and cash flow increase, so will the stock price.