Natural gas obtained from shale formations is known as shale gas. The shale acts as both the source and the reservoir for the natural gas. Recent shale gas wells are primarily horizontal and need artificial stimulation, like hydraulic fracturing, to produce natural gas.
The most significant trend in the US natural gas production is the rapid rise in production from shale formations by companies such as ConocoPhillips (COP), Exxon (XOM) and Chevron (CVX). This is attributable to significant advances in the use of horizontal drilling and well stimulation technologies. Shale gas now accounts for 20% of US natural gas production and shale formations across North America are said to hold enough gas to meet domestic demand for a hundred years.
We have a price estimate of $68.44 for ConocoPhillips which is about 6% ahead of the current market price.
ConocoPhillips, in partnership with Lane Energy, plans to drill a horizontal well in Poland to tap the country’s 3 trillion cubic meters of shale gas reserves. Poland consumes 14 billion cubic meters of gas a year and imports more than 70% of it from Russia. It is easy to see how the country could benefit from starting shale gas drilling as soon as possible. Not only could it decrease its dependency on Russia, it might even turn into a gas exporter.
Natural Gas Prices Can Moderate on New Supply
Unconventional sources of natural gas, like shale formations, have increased the supply of gas in recent years. Though demand has also increased, this increase in supply has been much greater. Global production of natural gas in 2009 was nearly 3 trillion cubic meters while the consumption was nearly 2.9 trillion cubic meters. We forecast that natural gas prices will increase modestly from $5 per thousand cubic feet in 2010 to $7 per thousand cubic feet by 2014, still lower than 2008 level of $8 per thousand cubic feet.
Modify the chart below to see the impact of changes in natural gas prices on ConocoPhillips’ stock value.
ConocoPhillips to Benefit from Production Increase
Although there is a limited upside to the price of natural gas, ConocoPhillips is expected to make up for this by increasing its production and sales. The company produced 1.7 trillion cubic feet of natural gas in 2009 which we forecast will trend upwards in the years ahead.
Aggressive production from shale gas reserves in Poland could even push the company’s natural gas output beyond our base case estimates.
Modify the chart below to see the impact of changes in natural gas output on ConocoPhillips’ stock value.
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