The federal government’s Energy Information Administration (EIA) reported an in line decline in natural gas supplies. Stockpiles held in underground storage in the lower 48 states fell by 190 billion cubic feet (Bcf) for the week ended Feb. 12, 2010.
The inventory decline was the eleventh in as many weeks. This has finally started to erode the record-high storage amounts, as frigid temperatures continue to chill major gas-consuming regions in the U.S.
Though the heating season officially began on Nov 1, 2009, net injections continued through November on a national basis. As a result, until recently, gas in storage remained well above the normal range at this time of the year.
However, the ongoing surge in the commodity’s demand has almost erased a hefty surplus over last year’s inventory level and significantly trimmed the excess over the five-year average level.
The current storage level, at 2.03 trillion cubic feet (Tcf), is up 1.3% from last year’s level and 2.7% above the five-year range (as clear from the following chart from the EIA). Current stocks are 26 Bcf above last year’s level and 53 Bcf above the five-year average.
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. Stockpiles went on to create new highs last year as the economic downturn ate into demand, and natural-gas producers continued to unlock new supplies from onshore natural-gas fields known as shales.
Months of mild weather further weakened demand for the fuel to heat homes and businesses. As a result, natural gas prices (referring to Henry Hub spot prices) trended down to a 7-year-low level of sub-$2 per million Btu (MMBtu) in Sept. 2009.
However, on the back of the sustained inventory drawdown, the commodity staged a phenomenal recovery, breaching the $5.70 per MMBtu level during early Feb. 2010. Things appear to be getting better for the natural gas players with the belief that storage levels are likely to exit the current heating season at lower levels than expected.
Having said that, the specter of a continued glut in domestic gas supplies (storage levels remain 2.7% above their five-year average) still exists and the inventories remain higher compared to averages for this time of year.
Given the depressed state of the commodity, the in-line drop in reserves pulled down natural gas futures prices on the New York Mercantile Exchange (NYMEX). In particular, during the last few days, natural gas futures have fallen to an 11-week low, pressured by expectations of mild temperatures in the U.S. over the next few weeks.
With winter cold subsiding, demand for natural gas for heating and power-plant fuel will reduce. Further pressurizing the commodity is the rapid rise in the number of drilling rigs working in the U.S. (rig count has climbed 34% from a seven-year low reached last July) that signals a production increase later this year.
These factors translate into limited upside for natural gas-weighted companies and related support plays.
Therefore, we maintain our cautious stance on natural gas-focused E&P players such as XTO Energy (XTO), EOG Resources (EOG), Chesapeake Energy (CHK), Anadarko Petroleum Corp. (APC), EnCana Corp. (ECA) and Devon Energy Corp. (DVN).
Additionally, we remain skeptical on land drillers such as Nabors Industries (NBR) and Patterson-UTI Energy (PTEN), 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 “XTO”
Read the full analyst report on “EOG”
Read the full analyst report on “CHK”
Read the full analyst report on “APC”
Read the full analyst report on “ECA”
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 “HAL”
Read the full analyst report on “BP”
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