The Rising Influence of Rising Affluence

[Democritus_of_Abdera]

CT, Regarding Natural Gas....

I read with interest your post concerning GS’s projections regarding Natural Gas.

Personally, I tend to agree that “the picture doesn’t look like it should get better any time soon ...”

However, Michael Sutherlin, CEO and President of Joy Global, has a different opinion, which he detailed in the question and answer session of yesterday’s conference call. In particular, he argues that Natural Gas prices will gravitate back to the $7 range within the next 12 months or so, and implies that the move up might be rapid once it starts.

I have included the actual statement he made regarding Natural Gas Price projections below. Apparently, his remarks are based upon insights he has gained as a board member of TESCO. TESCO serves the oilfield and natural gas drilling markets; it has a market cap of about $250M.

....one of the reasons we have tremendous amount of gas in storage today is because there’s no industrial demand for natural gas, very low industrial demand. So it’s not just a plentiful supply, but it’s low industrial demand and with the – as the economy recovers that demand will shift pretty, pretty quickly. The other factor for natural gas is that the depletion rates on the natural gas wells, particularly the new Shale plays that the depletion rates are dramatically fast. 18 months is a typical average Shale. And the drilling part of it – I still have a connection to the oil and gas drilling business in one of the boards I am on and in that industry, it still is a rule of thumb that no one is starting drilling programs with natural gas prices below $7. That’s sort of the threshold for economics there. So you take that $7 and say well if natural gas depletes because there’s no drilling and the drilling numbers are down dramatically. There’s an increase in rig count in the U.S. but it’s all around oil drilling, not around gas drilling. So, you say I’m going to have $7 gas before I start drilling and in the meantime the economy gets a little better and industrial demand picks up. You can see the supply demand situation change really, really quickly. .... So, I think that we have an unusual situation because a number of factors that have just reduced the demand of gas at a time when we had some improvement in supply and now we have storage capacity absolutely full. I don’t think that, that’s sustainable and I don’t think that there’s enough gas out there without drilling programs that can get the $7 per million BTU levels. And so, I think that this is going to be correcting itself over the next 12 months.

The actual statement is near the end of the CC which can be accessed at: http://investors.joyglobal.com/eventdetail.cfm?eventid=71927