Yesterday, in its weekly report, the Energy Information Administration (EIA) said that natural gas inventories for the latest week came towards the lower end of expectations. Stockpiles held in underground storage in the lower 48 states rose by 52 billion cubic feet (Bcf) to about 3.20 trillion cubic feet (Tcf) for the week ended August 14.

The data also showed that inventory levels were 19% above the five-year average of about 2.69 Tcf, and 21% above last year’s storage level of about 2.64 Tcf (as clear from the following EIA chart).

The build was smaller than last year’s 82 Bcf build and the five-year-average injection of 56 Bcf. However, the relentless increase in gas storage levels continue to add to the long list of issues weighing on the commodity. Natural gas prices rallied earlier last year, reaching over $13 per million Btu (MMBtu) in July 2008, before trending down. Prices have since dropped sharply to the current level of $3.36 per MMBtu (we are referring to Henry Hub spot prices here).

Continued strong domestic production (from a number of unconventional natural gas fields) and recessionary consumption (due to the economic downturn), particularly in the industrial sector, are at the core of the commodity’s current woes. The supply picture is expected to reverse in the coming months as the lagging effect of the sharp drop in domestic drilling activity takes effect. Partly offsetting the production drop is the expected ramp-up of LNG imports this year.
The commodity’s weak near-term outlook, coupled with the ongoing credit market turmoil, has prompted natural gas producers to curtail capital expenditure plans for 2009. As such, we remain cautious on natural gas-focused E&P players such as XTO Energy (XTO) Chesapeake (CHK) and EOG Resources (EOG). We currently rate shares of these companies as Neutral.

In particular, we remain wary of land drillers such Nabors (NBR) and natural gas-centric service providers such as BJ Services (BJS), given the extent of excess capacity in the sector that is expected to weigh on dayrates and margins well into next year. We have Underperform recommendation on both the companies.
Read the full analyst report on “XTO”
Read the full analyst report on “CHK”
Read the full analyst report on “EOG”
Read the full analyst report on “NBR”
Read the full analyst report on “BJS”
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