Energy Prospectus

Cut from Simmons Morning Report 12-16-2013: "Gas in storage is currently 3,533 bcf which is 109 bcf or 3% below the 5 year average. Compared to one year ago, current gas in storage is 273 bcf lower or -7% y/y. Based on the extreme cold weather experienced across the U.S. last week, the next weekly gas storage number (for the week ending 12/13) should shatter the all time December record withdrawal of 208 bcf (set in 2000) and might make a run at the largest weekly withdrawal ever of 274 bcf (set in Jan '08). At the end of December, we estimate gas in storage could be at a greater than 500 bcf deficit relative to last year (compared to a 273 bcf deficit currently) and at least 7% below the 5 year average. Assuming normal weather for the remainder of the winter season, we estimate that gas in storage should end the winter withdrawal period (April 1, 2014) at 1.55-1.60 Tcf which compares to ~1.70 Tcf on April 1, 2013. Winter weather to date has been very accommodative with Nov '13 US population weighted heating degree days (HDDs) up 6% vs. both last year and normal. For the first two weeks of December, population weighted HDDs are up 52% vs. last year and down 3% vs. normal (week ending 12/7) and up 58% vs. last year and up 29% vs. normal (week ending 12/14)."

My take is that if the outlook for January is colder than normal, we have a good chance of seeing Ngas push over $5.00/mcf.

Simmons outlook for Ngas in 2014 is bearish as there will be a lot of Eagle Ford associated gas coming on-line + increasing Marcellus production. Meaningful LNG exports do not start until late 2015. Nowever, a cold winter should get prices to stay over $4.00 all year, which is a nice improvement.

Simmons: "So does the cold weather and improving storage outlook redefine our '14 gas market outlook? The short answer is no. In order for us to become resolutely bullish on natural gas, we need to see some combination of production flattening or declining and/or a structural improvement in demand. Regarding production, we expect continued production growth. In fact, we are estimating a faster rate of production growth in '14 (2.9% y/y) than in '13 (1.2% y/y). This robust production growth forecast is driven by associated gas, the Marcellus and a flattening of the decline rates in many gas plays where there has been little drilling over the past few years. Our gas production forecast is further fortified by natural gas prices at >$4. Regarding structural demand changes, we have written extensively about this in the past and see 2015 as the first year in the structurally improving long term demand story. Unfortunately, 2014 is not that year."

LNG export capacity will increase to over 6 bcfpd by end of 2016.

"Winter weather remains the big wildcard. The importance of cold weather cannot be overstated as it can lead to substantial storage draws in a very short period of time. In addition, with more gas production concentrated in the L48 onshore, there is a greater risk to supply disruptions from freeze offs. If the U.S. continues to receive below normal cold weather for the remainder of the winter season, then gas in storage should end the winter season well lower than our current 1.55-1.60 Tcf forecast. This would certainly place upward pressure on gas prices and could even incentivize some additional gas drilling, depending on how low storage levels go when we exit the withdrawal season. Ultimately, we believe the gas market is going to provide the necessary price signal to get gas in storage up near 3.8-3.9 Tcf on Nov 1, 2014 (in line with the 5 year average), especially in light of the meaningful structural demand drivers starting in '15 (a number of coal plant retirements, increased gas exports to Mexico and at the end of '15 the first LNG train starting up)."