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Outlook for gas cos. concerns investors Natural gas prices down more than 40 percent since January whereas costs for gas producers have risen 50% over last three years Bree Fowler Associated Press Business Writer
While oil prices have been hitting new highs, natural gas prices have dropped more than 40 percent since the beginning of year, prompting investor worries about the long-term outlook of the companies that produce it and causing a pull back in natural gas stocks.
Canada’s National Energy Board said in an outlook released June 8 that natural gas prices are expected to remain low through the summer but increase in the winter.
Due to a mild winter and fuel-efficiency measures that have cut demand and allowed inventories to increase, NEB said natural gas prices could sink as low as US$5 per thousand cubic feet by September which is significantly lower than the US$14.99 per mcf record high set this past December.
“We are anticipating oil prices to remain high, natural gas prices to drop during the summer and then increase again in the winter,” Ken Vollman, NEB chairman, said in a press release.
Drilling budget concerns “People are very apprehensive about natural gas, because most producers are much more leveraged to gas than oil,” New York-based Oppenheimer & Co. analyst Fadel Gheit said. “If gas prices keep going down, they might have to cut their drilling budgets.”
NEB analyst Paul Mortensen was quoted in Calgary press reports as saying any reduction in production would be limited to areas of high-cost production, including the U.S. Rockies and southeastern Alberta. He said drilling is not likely to slow down, since prices are expected to recover by mid-winter, but that some producers may elect to delay the start-up of production from new wells.
On June 8, oil prices dropped below $70 a barrel for the first time in two weeks (see story this page). Meanwhile, natural gas prices edged up after months of decline.
Gheit said the divide between oil and natural gas prices should narrow if natural gas prices remain low, because commercial energy users that can choose between natural gas and oil will begin to shift toward natural gas, driving demand and prices back up.
Although disruptions caused by storms and hurricanes in the Gulf of Mexico will most likely create “hiccups” for natural gas companies, Gheit said the key factor affecting investors and consumers alike will be the upcoming winter’s weather.
Last winter’s warmer-than-average temperatures resulted in less demand for heating fuel and higher gas inventories, but a winter with relatively normal weather would be enough to wipe out those inventories and send prices back up, he said.
At the same time, the futures market currently shows natural gas prices rising 50 percent by December, while oil prices are expected to remain relatively flat, he said.
Low natural gas prices are good for utility companies and consumers, but they hurt the profits of natural gas companies, which have seen their operating costs rise 50 percent over the past 3 years, Gheit said.
Some natural gas providers are taking steps to lock in rates and avoid unexpected price changes.
Range Resources Corp., which has about 80 percent of its reserves in natural gas, recently doubled its natural gas hedge position to about 60 percent to 65 percent.
John H. Pinkerton, the Fort Worth, Texas-based company’s chairman and chief executive, said the company wants to protect itself against rising service costs and price fluctuations.
“We see a lot of short-term volatility in the natural gas markets, and we’re trying to take some volatility out,” Pinkerton said. “In the long term, we’re extremely bullish.”
—Petroleum News contributed to this report
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