ENERGY
Plunging natural gas prices chill sector
MARTIN MITTELSTAEDT
From Wednesday's Globe and Mail
Published Wednesday, Oct. 06, 2010 6:30AM EDT
Last updated Wednesday, Oct. 06, 2010 6:37AM EDT
Gold, silver and a host of other commodity prices are in liftoff mode. But one important material isn’t joining in the party: natural gas(NG-FT3.870.133.45%).
The fuel’s price has been falling recently, and by many accounts, is likely to continue going that way, possibly for a long time.
While the front-month natural gas futures contract edged up Tuesday to $3.77 (U.S.) per million British thermal units, a rise of 1 per cent, it had fallen nearly 6 per cent over the previous three sessions. Earlier this year, it was flirting with $6.
If the downward trend continues, and many market players think it will, the lower prices will be a major drag on the earnings of North American energy producers with a heavy exposure to natural gas, although they’ll be a boon to homeowners during the upcoming winter’s heating season in the form of lower utility bills.
Prices are following the path of least resistance lower because of poor demand-supply fundamentals, according to market experts.
“It looks like there is still more supply growth to come, both from the U.S. and now potentially from Canada,” said Martin King, vice-president of institutional research at FirstEnergy Capital Corp. in Calgary. “A lot of the demand growth seems to have stalled out.”
Given the trends, prices are heading a lot lower, in his view. He said he “would not be surprised to see something” in the low $3 area.
The plunge in gas prices has caught some of the savviest energy market players off-side in their trades and pronouncements. Many of these investors had been touting gas as a money-winning contrarian play, with the commodity so unloved it was bound to rally. Natural gas in the past has had incredible upside sprints, and in late 2006 traded at near $16, making this year’s levels seem cheap by comparison.
But the call to go long has either been wrong, or early, depending on the point of view.
The Toronto Stock Exchange-listed TBP Energy Fund (TBP.UN-T7.46----%) managed by the legendary U.S. energy financier of the same name, was loaded up with natural gas stocks, such as Devon Energy(DVN-N66.300.921.41%) Chesapeake (CHK-N22.590.271.21%) andEncana (ECA-T30.560.140.46%) along with a major futures position in the commodity, according to its most recent statement, for the period ended June 30.
The fund, sold to the public earlier this year at $10 a unit, has recently been trading around $7.50, for a loss of about 25 per cent from the initial offering, although the rally in oil prices has lifted the security from its August low of $6.75.
The fund manager could not be reached for comment.
We believe the natural gas market will be amply supplied through 2011 but we expect natural gas prices to move toward $5.50 by year-end 2011.— RBC Dominion Securities
Another prominent forecaster calling for higher prices was Henry Groppe, the octogenarian patriarch of highly regarded Texas petroleum consulting firm Groppe Long & Littell.
In April, he said prices, then fluctuating between $4 and $5 per million BTUs, would rally to more than $8 by last month. The call was based on a view that the current surge in output from shale gas deposits, the big reason supplies are increasing, wasn’t sustainable. Mr. Groppe could not be reached for comment.
RBC Dominion Securities last month lowered its price projections for natural gas to $4.50 this year from $5, to $5 next year from $5.75 and its long-term level to $6 from $6.50.
“We believe the natural gas market will be amply supplied through 2011 but we expect natural gas prices to move toward $5.50 by year-end 2011” because of improving global economic growth, the bank said in its Global Energy Research publication.
Encana
The bank has downgraded gas-focused Encana to “sector perform” and reduced its target price to $35 from $37.
While the company is “one of the best-managed independents with superior execution capability” the bank said Encana’s strategy to double its production volume per share over the next five years in the midst of high supply conditions is likely to weigh upon natural gas prices for years.
Among senior firms it favours are companies with more of an oil focus, including Canadian Natural Resources Ltd., Talisman Energy Inc., Husky Energy Inc. and Suncor Energy Inc.
Not all gas producers are unloved. Canaccord Genuity has four top buys among Canadian firms with market caps over $250-million (Canadian) that its analysts believe can return more than 25 per cent.
It estimates that Calgary-based explorer Fairborne Energy(FEL-T4.280.010.23%) could rise 80 per cent; Progress Energy(PRQ-T11.410.201.78%) a mid-size producer focused on exploration, development and production in northwest Alberta and northeast British Columbia could rise 49 per cent; Daylight Energy (DAY-T10.07-0.03-0.30%) a mid-tier producer in Western Canada has an upside of 48 per cent, and NuVista Energy (NVA-T10.20-0.02-0.20%) has a potential return of 31 per cent. All of the companies have sizable exploration activities.
The weakness in natural gas pricing, while difficult for producers, has a silver lining for anyone using the fuel. Enbridge cut Ontario gas prices earlier this month by 15 per cent. The annual saving on a typical residential bill will be about $60, according to an estimate by the company.
ANALYSIS: Plunging Natural Gas prices chill sector, Martin Mittelstaedt, October 6, 2010, The Globe and Mail.
Prices of Natural gas are getting lower and lower due to poor demand and supply fundamentals, and many people think they will only get worse. The lower the prices get, the lower the energy workers are making, but homeowner's won't be too depressed. Many people invested in Natural Gas because of its incredible rises upwards in the past, but they think it may be too late or too early. The RBC Dominion Securities say that natural gas prices will be ample throughout 2011, but will falter in the end because of improving economic growth. The natural gas company Encana is also proving to almost weigh down on the prices because of its strategy to double its production volume per share over the next five years. The good news is, natural gas prices now are beneficial to anyone using the fuel.
Strands it relates to:
This article relates a lot to "Factors influencing success in international markets" because supply and demand fundamentals are practically the basics of all businesses. If theres not enough demand for them, the prices will drop and its harder on the energy workers that get the natural gas. It also relates to "Challenges, Approaches, and Distribution" because not enough demand and too much supply is quite the challenge for the people that work to get natural gas but not those who will demand it. Also, even if it's not as common; if new energy workers were to begin working in a natural gas plant of some sort they wouldn't start of with good wages.
Thoughts and Opinions:
Natural Gas is something that most people at young ages pay less attention to. If the natural prices continue getting lower, eventually the company Encana will run out of resources to make the gas. This in turn will make other countries lose gas, and their businesses will be bankrupt. Maybe if we bought more fuel, it'll be in a high enough demand to get the prices higher again.
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