AI
Monday, August 25, 2008 2:00:34 PM
Gobert: Is natural gas undervalued?
Wilf Gobert, Financial Post
Published: Monday, August 25, 2008
http://www.financialpost.com/story.html?id=747626
A stunning six-week decline in prices of crude oil, natural gas, and energy stocks bottomed out in mid-August. A rally through Thursday last week saw crude oil recover one-quarter of its losses, while energy stocks recovered one-third of losses. However the greatest losses and smallest rally was in natural gas prices, raising the question: is natural gas undervalued?
Crude oil on the NYMEX fell from its early July high of over US$145 per barrel, to a low on August 15 of US$113, a loss of 22%. The rally took crude to US$121.60, a recovery of 27% of the loss. The TSX Energy index followed closely, with a decline of 22% through August 15, then a rally of 9.7%, or a recovery of 34% of losses.
While some observers have noted this close correlation of crude oil prices and energy stocks, a more negative factor for Alberta and energy stocks was the trading pattern of natural gas.
The near-month NYMEX contract for natural gas traded at a 2008 high of US$13.58 per mmbtu (million BTU) in early July, but then declined by a whopping 42% to a low on Aug. 18 of US$7.89, even as crude oil began to rally. Natural gas then rallied a feeble 4.6%. While a barrel of crude oil has a heating content of approximately six mmbtu per barrel of oil, current prices are in a ratio of 14.4.
Note that historically, the ratio is about eight units of natural gas to barrel of oil. Based on that historical average, natural gas should be trading at more than US$14 per mmbtu, not US$9 as it is now. So what's up?
First of all, the ratio of crude oil to natural gas prices is very volatile and trades closer to its ratio of economic value in the winter time, when North American demand exceeds production, with the difference supplied from storage facilities.
In the warmer months, April through October, consumption is less than production, with the excess supply injected into storage facilities. One of the summer supply concerns was LNG imports, which upset natural gas prices in the summer of 2007. However, LNG was never a supply problem in the US in 2008 as high LNG prices in the rest of the world kept the ships away from the US.
Two other issues have combined to disappoint the natural gas supply bulls. One is US domestic gas production and the other is weather.
US natural gas production has risen by over 8% in 2008 compared to 2007, a third consecutive year of production growth from the lower-48 states. Previously, US production had fallen or stagnated for over 25 years. High prices have unleashed the economics of non-conventional sources of natural gas and the US exploration industry has responded.
Two weather factors have also diminished the optimism for natural gas prices. Hurricanes have not caused significant losses of production from the Gulf of Mexico, though it is a perverse psychology for investors hope for short term bad news to affect long term investing decisions.
On the other hand hot summer weather over most of the US is a significant factor in peak summer demand for electricity, with peaking supplies largely supplied by natural gas fired co-generation facilities. For the first two weeks of August, cooling degree days in the US were eleven percent below normal and 29% below the same period in 2007.
The burgeoning US domestic supply of natural gas and the low demand for electricity for air-conditioning, has caused injections into natural gas storage (read: excess supply) for the past five weeks to exceed injections for the same period in 2007, the first time this negative comparison has persisted in the 2008 injection season.
The point is that natural gas prices may be fundamentally undervalued relative to crude oil, but without a major hurricane shutting down production in the Gulf of Mexico, natural gas prices are likely to stay undervalued until the winter heating season might change the supply/demand balance.
Natural gas stocks like Devon Energy and EOG in the US and EnCana should underperform the energy index until winter speculation brings back the buyers.
Wilf Gobert is an independent energy analyst based in Calgary and a senior fellow with the Fraser Institute.
-----Picking up on the fixed price LNG contract, convertible debentures, past history, etc,etc,etc....Might have to go Long LNG and short EBOF and PNGX. Imagine that?!?!? Would management really put shareholders in that position?!?! Where what's good for the Industry is bad for the company? That might surprise some, but not if you know what ol' Willie was bringing to those board meetings :)
--Better hope for a WARM WINTER!!!!!
Actually, mark this post and we'll see in 6 months.
LNG = $7.89 MMBtu
EBOF = .006 (ANOTHER ~90% whack this month, can it go lower?)
PNGX = $4
Wilf Gobert, Financial Post
Published: Monday, August 25, 2008
http://www.financialpost.com/story.html?id=747626
A stunning six-week decline in prices of crude oil, natural gas, and energy stocks bottomed out in mid-August. A rally through Thursday last week saw crude oil recover one-quarter of its losses, while energy stocks recovered one-third of losses. However the greatest losses and smallest rally was in natural gas prices, raising the question: is natural gas undervalued?
Crude oil on the NYMEX fell from its early July high of over US$145 per barrel, to a low on August 15 of US$113, a loss of 22%. The rally took crude to US$121.60, a recovery of 27% of the loss. The TSX Energy index followed closely, with a decline of 22% through August 15, then a rally of 9.7%, or a recovery of 34% of losses.
While some observers have noted this close correlation of crude oil prices and energy stocks, a more negative factor for Alberta and energy stocks was the trading pattern of natural gas.
The near-month NYMEX contract for natural gas traded at a 2008 high of US$13.58 per mmbtu (million BTU) in early July, but then declined by a whopping 42% to a low on Aug. 18 of US$7.89, even as crude oil began to rally. Natural gas then rallied a feeble 4.6%. While a barrel of crude oil has a heating content of approximately six mmbtu per barrel of oil, current prices are in a ratio of 14.4.
Note that historically, the ratio is about eight units of natural gas to barrel of oil. Based on that historical average, natural gas should be trading at more than US$14 per mmbtu, not US$9 as it is now. So what's up?
First of all, the ratio of crude oil to natural gas prices is very volatile and trades closer to its ratio of economic value in the winter time, when North American demand exceeds production, with the difference supplied from storage facilities.
In the warmer months, April through October, consumption is less than production, with the excess supply injected into storage facilities. One of the summer supply concerns was LNG imports, which upset natural gas prices in the summer of 2007. However, LNG was never a supply problem in the US in 2008 as high LNG prices in the rest of the world kept the ships away from the US.
Two other issues have combined to disappoint the natural gas supply bulls. One is US domestic gas production and the other is weather.
US natural gas production has risen by over 8% in 2008 compared to 2007, a third consecutive year of production growth from the lower-48 states. Previously, US production had fallen or stagnated for over 25 years. High prices have unleashed the economics of non-conventional sources of natural gas and the US exploration industry has responded.
Two weather factors have also diminished the optimism for natural gas prices. Hurricanes have not caused significant losses of production from the Gulf of Mexico, though it is a perverse psychology for investors hope for short term bad news to affect long term investing decisions.
On the other hand hot summer weather over most of the US is a significant factor in peak summer demand for electricity, with peaking supplies largely supplied by natural gas fired co-generation facilities. For the first two weeks of August, cooling degree days in the US were eleven percent below normal and 29% below the same period in 2007.
The burgeoning US domestic supply of natural gas and the low demand for electricity for air-conditioning, has caused injections into natural gas storage (read: excess supply) for the past five weeks to exceed injections for the same period in 2007, the first time this negative comparison has persisted in the 2008 injection season.
The point is that natural gas prices may be fundamentally undervalued relative to crude oil, but without a major hurricane shutting down production in the Gulf of Mexico, natural gas prices are likely to stay undervalued until the winter heating season might change the supply/demand balance.
Natural gas stocks like Devon Energy and EOG in the US and EnCana should underperform the energy index until winter speculation brings back the buyers.
Wilf Gobert is an independent energy analyst based in Calgary and a senior fellow with the Fraser Institute.
-----Picking up on the fixed price LNG contract, convertible debentures, past history, etc,etc,etc....Might have to go Long LNG and short EBOF and PNGX. Imagine that?!?!? Would management really put shareholders in that position?!?! Where what's good for the Industry is bad for the company? That might surprise some, but not if you know what ol' Willie was bringing to those board meetings :)
--Better hope for a WARM WINTER!!!!!
Actually, mark this post and we'll see in 6 months.
LNG = $7.89 MMBtu
EBOF = .006 (ANOTHER ~90% whack this month, can it go lower?)
PNGX = $4
