Keith Schaefer of the Oil and Gas Investments newslet-
ter writes today about Bernstein analyst Benjamin Dell
“showing overall decline rates in natural gas from 15% in
1992 to 25% in 2000 and 29% in 2008, and this higher de-
cline rate will help lower production. First year production
declines were much sharper—62% for horizontals and 45%
for non-horizontals.” Bernstein and Co. had a very bullish
report published just recently.
Schaefer continues, “And of course they are right. Pro-
duction is already decreasing, and natural gas prices and
stocks will go higher sometime—but it’s the timing that
has investors confused. Will investments in natural gas
stocks be dead money for a long time or are these stocks
on the cusp of a major recovery?
Schaefer continues, “How important would that be for
investors? Most Canadian gas stocks have almost no
positive cash flow right now, have used up 70% or more of
their debt capacity, and yet have stock prices that are al-
ready pricing in $5-$6 gas.
High profile market commentator Josef Schachter pub-
lished in his most recent “Maison Monthly” of August
12th, “We remain concerned about the rising crude and
product inventories in the U.S. We expect energy prices
to decline into the October shoulder season and for the
S&P/TSX Energy Index to retreat.” But then he gets hope-
ful and writes, “Investors should buy during this weak-
ness.”
Some of his charts showing the huge builds in inven-
tory for both oil and natural gas, Schachter looking at the
natural gas situation writes, “With the price of natural gas
declining to uneconomic levels, and the resultant fiscal
discipline of a drilling decline—the question becomes;
why is storage rising?”
He then looks at two companies, Encana in Canada and
Chesapeake in the States and notes that both of them
have very successful hedging programs. Encana with two
thirds of its production hedged at $9.13/mcf and Chesa-
peake with 90% of its production at a very decent price of
$7.30/mcf. However, once we get into next year, suddenly
those hedges are gone. Schachter then writes, “It is our
contention that once the strong hedge books are used up,
producers will face reality and be forced to shut in high
cost production. This window for significant production
declines, just before winter, could set the stage for a mod-
est price recovery. If winter is very cold and inventories
shrink faster than normal, a more robust price outlook
may occur.
Schachter continues, “As a result of the present ex-
cess in storage, deliverability and weak demand, we see it
necessary to again lower our price outlook.”
As far as his conclusions, Schachter writes:
The price recovery for natural gas may take longer
than current expectations due to excessive invento-
ries, continued shale gas additions and strong hedg-
ing profits that end for most companies at the end of
this year. Only then will fundamentals finally set the
stage for a recovery in late 2010.
Into late September and through October, we see sig-
nificant erosion in the stock prices of natural gas
companies. If so, we would move to a bullish posture
again and would recommend investors become fully
invested in their favorite natural gas securities.
Our top picks for purchase during the upcoming cor-
rection from the Maison Universe are: Delphi Energy
(DEE), Galleon Energy (GO), Questerre Energy (QEC) and
Vero Energy (VRO).”
