The federal government’s Energy Information Administration (EIA) reported a bigger-than-expected increase in natural gas supplies, reflecting mild temperatures. Stockpiles held in underground storage in the lower 48 states rose by 104 billion cubic feet (Bcf) for the week ended May 21, 2010. The current storage level, at 2.27 trillion cubic feet (Tcf), exceed last year’s level by 71 Bcf (3.2%) and remain 318 Bcf (16.3%) above the five-year average. This is clear from the following chart from the EIA.
Working Gas in Underground Storage Compared with 5-Year Range
Note: The shaded area indicates the range between the historical minimum and maximum values for the weekly series from 2005 through 2009.
Source: Form EIA-912, “Weekly Underground Natural Gas Storage Report.” The dashed vertical lines indicate current and year-ago weekly periods.
The most recent inventory addition, though higher-than-anticipated, marks the second consecutive week-over-week decline in the five-year average (from 16.6% to 16.3%). Yet natural gas supplies remain above the record levels established in 2009 and are currently at historical highs for this time of year.
The specter of a continued glut in domestic gas supplies still exists, with storage levels remaining 16% above their five-year average. Following the end of the three-month cold snap (from Dec. ‘09 through Feb. ’10), there has been a significant reduction in space-heating demand.
Further pressurizing the commodity is the rapid rise in the number of drilling rigs working in the U.S. (the natural gas rig count has climbed 46% from a seven-year low reached last July) that signals a supply glut later this year in the face of sluggish industrial demand. Meanwhile, production from dense rock formations (shale) remains robust and demand from power plants remains soft.
There are concerns among traders that the market will be oversupplied in the short- to medium-term, with rig counts going up and industrial demand still struggling due to the weak economy. These factors translate into limited upside for natural gas-weighted companies and related support plays. Given the depressed state of the commodity, natural gas prices have dropped to around $4.30 per million Btu (MMBtu), after attaining this year’s peak of $7.51 per MMBtu on January 7 (referring to Henry Hub spot prices).
The gap between supply and demand is expected to reverse in the coming months as producers bet on the improving U.S. economy and forecast of an active hurricane season that begins next week and runs through November.
Until then, we maintain our cautious stance on natural gas-focused E&P players such as EOG Resources (EOG), Anadarko Petroleum Corp. (APC), Chesapeake Energy (CHK) and Devon Energy Corp. (DVN).
Additionally, we remain skeptical on land drillers such as Nabors Industries (NBR), Patterson-UTI Energy (PTEN) and Helmerich & Payne (HP), as well as natural gas-centric service providers such as Halliburton Company (HAL). Although we expect the land rig count to continue with its steady rise during 2010, the large amount of excess capacity in the sector will weigh on dayrates and margins well into the year.
Oil majors like BP Plc (BP) that have significant natural gas operations are also expected to remain under pressure until pricing and demand improve further.
All the above-mentioned companies currently have Zacks #3 Ranks (Hold), meaning that these stocks are expected to perform relatively the same as the overall market during the next 1-3 months. Therefore, investors should maintain their current positions in the stocks over this time period.
Read the full analyst report on “EOG”
Read the full analyst report on “APC”
Read the full analyst report on “CHK”
Read the full analyst report on “DVN”
Read the full analyst report on “NBR”
Read the full analyst report on “PTEN”
Read the full analyst report on “HP”
Read the full analyst report on “HAL”
Read the full analyst report on “BP”
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