Ngas supply/demand will tighten

[dan_s]

Baker Hughes, an oilfield services company, reported that rigs targeting natural gas decreased last week to 369 from 378 for the week ending October 11. Natural gas rigs drilling are down 16% from the beginning of 2013. E&P companies will not allocate capital to projects that loose money. The gas wills being drilled today are primarily in the wet gas areas, so liquids make them economic.

The breakeven Ngas prices in the sweet spots of all the dry gas plays (Barnett, Fayetteville and Haynesville) is estimated at over $4.20/mcf and that ignores the leasehold costs. It takes at least $7/mcf to recover the leasehold costs. Devon Energy, the largest leaseholder in the Barnett, says they will not drill (except as required to hold acreage) until natural gas prices top $6/mcf.

Right now we are getting all the gas we need from the "associated" gas that is produced from the oil shale plays.

The U.S. will consume over 26.5 TCF in 2013 and an estimated 27.2 TCF (74.5 bcfpd) will be consumed in 2014. When we start exporting LNG in 2015 the demand will go up by over a TCF each year. I believe 2016 will be a very bullish year for natural gas.

A normal winter should push Ngas over $4.00/mcf this quarter and for all of 2014. A cold winter would push it a lot higher. I continue to use $3.50/mcf in all of my 2014 forecast, but that will change is we get a cold start to this winter.

Investors should remain heavily weighted to oil, but holding companies like RRC, UNT, SM, XEC, EOG, GPOR and CRK will give your portfolio enough exposure to a possible run up in Ngas prices.