49 replies to this topic

[johngeorge]

Here's a recent downer from Casey Research: http://www.zerohedge...t-gas-companies

Which Stocks Will Lose the Most in the Coming Energy Bloodbath

Snip >>>>>>>>

As you probably know, the price of natural gas has collapsed more than 60% over the past 12 months. Energy firms that carry billions of dollars of reserves on their books based on the "old" prices (around $4 per MMBtu) will have to "write-down" the value of those reserves to reflect the new prices (below $2 per MMBtu).

Natural gas reserves that were "economically recoverable" – and thus, extremely valuable – when natural gas traded for more than $4 per MMBtu back in 2010 are going to be worth much, much less... now that natural gas is below $2 per MMBtu.


But... for a lot of producers, these higher-priced hedges are about to expire.

Encana, Canada's largest natural gas company, is a good example. The company had prudently hedged lots of the gas it sold over the last six months. This means it was still realizing $4 or $5 per MMBtu on its sales. Now, those hedges are expiring... and the new hedges are at much lower prices. Encana's cash flow and its economically recoverable reserves are going to plunge.

Encana isn't the only natural gas company in this situation.

In recent months, the second-largest natural gas producer in the U.S., Chesapeake Energy, removed most of its gas hedges for 2012 and 2013 based on the belief that prices are at or near a bottom.

Such a move, known as going "naked to the strip," marks a major turnaround for a company that was one of the best and most active hedgers in the sector. Now, Chesapeake has no protection if gas prices continue to slide. It's a risky scenario seeing as prices are currently below production costs in most U.S. gas basins.

For investors, the fact that many North American gas producers are seeing their high-priced hedges expire makes it more important than ever to understand a company's cash flow picture going forward.

An investor must ask the following questions...

What percentage of production remains hedged and at what price?

How much will a company have to sell at or near the spot price?

What is the company's average cost of production?

Is the loss of high hedges about to send the company into the red?

These are the questions you need to ask... But be warned: you won't find very many producers with pretty short- and medium-term cash flow pictures. I expect natural gas prices to remain between $1.50 and $2 per MMBtu for the next 12 months.

Those prices will render a lot of production uneconomic. They will force companies to massively write down the value of their reserves. Cash flows will plummet. Shares in gas producers, while down a lot over the past year, will fall more than 25%.

The bloodbath in natural gas stocks is about to get worse.

Snip <<<<<<<<

[senorBS]

[quote name='johngeorge' date='May 13 2012, 11:33 AM' post='621311']
Here's a recent downer from Casey Research: http://www.zerohedge...t-gas-companies

Which Stocks Will Lose the Most in the Coming Energy Bloodbath

Snip >>>>>>>>

As you probably know, the price of natural gas has collapsed more than 60% over the past 12 months. Energy firms that carry billions of dollars of reserves on their books based on the "old" prices (around $4 per MMBtu) will have to "write-down" the value of those reserves to reflect the new prices (below $2 per MMBtu).

Natural gas reserves that were "economically recoverable" – and thus, extremely valuable – when natural gas traded for more than $4 per MMBtu back in 2010 are going to be worth much, much less... now that natural gas is below $2 per MMBtu.


But... for a lot of producers, these higher-priced hedges are about to expire.

Encana, Canada's largest natural gas company, is a good example. The company had prudently hedged lots of the gas it sold over the last six months. This means it was still realizing $4 or $5 per MMBtu on its sales. Now, those hedges are expiring... and the new hedges are at much lower prices. Encana's cash flow and its economically recoverable reserves are going to plunge.

Encana isn't the only natural gas company in this situation.

In recent months, the second-largest natural gas producer in the U.S., Chesapeake Energy, removed most of its gas hedges for 2012 and 2013 based on the belief that prices are at or near a bottom.

Such a move, known as going "naked to the strip," marks a major turnaround for a company that was one of the best and most active hedgers in the sector. Now, Chesapeake has no protection if gas prices continue to slide. It's a risky scenario seeing as prices are currently below production costs in most U.S. gas basins.

For investors, the fact that many North American gas producers are seeing their high-priced hedges expire makes it more important than ever to understand a company's cash flow picture going forward.

An investor must ask the following questions...

What percentage of production remains hedged and at what price?

How much will a company have to sell at or near the spot price?

What is the company's average cost of production?

Is the loss of high hedges about to send the company into the red?

These are the questions you need to ask... But be warned: you won't find very many producers with pretty short- and medium-term cash flow pictures. I expect natural gas prices to remain between $1.50 and $2 per MMBtu for the next 12 months.

Those prices will render a lot of production uneconomic. They will force companies to massively write down the value of their reserves. Cash flows will plummet. Shares in gas producers, while down a lot over the past year, will fall more than 25%.

The bloodbath in natural gas stocks is about to get worse.

Snip <<<<<<<<
[/quo

First let me say anything is possible, but where I disagree big time is with the $2 nat gas for another 6-12 months. We closed the week at 2.50, the bottom IMO is in place. Per things I have posted here Rigs drilling for nat gas have plunged 35% since Oct and demand is up (per EIA) and recent weekly injections are a lot below the seasonal averages. Dec. 2012 gas Futures are now a 3.35, March 2013 Futures at 3.50 - so if a compamy wants to hedge now they can at 3.35-3.50.
This hombre is way behing the curve in Senors opinion.

BSing away

Senor

[senorBS]

A little more on the rig counts in key areas like Haynesville. Haynesville Rig Count down another 6 to 38 from a high of 184. These are the Blockbuster Wells that routinely IP over 10mmcfd and have an 80% decline after 1st year. NG gaining traction and its going to do so in a Big Way late fall going into winter IMO. BSing away Senor

[johngeorge]

"NG gaining traction and its going to do so in a Big Way late fall going into winter IMO."

Senor

I agree with you. However, it looks to me like Nat Gas could have some downside or simply chop around this summer, but, its future is very, very bright.

Thanks for the updated info. Most appreciated.

Best to you.

[senorBS]

"NG gaining traction and its going to do so in a Big Way late fall going into winter IMO."

Senor

I agree with you. However, it looks to me like Nat Gas could have some downside or simply chop around this summer, but, its future is very, very bright.

Thanks for the updated info. Most appreciated.

Best to you.

Senor has to chuckle, is nat gas now the only bull market as commodities and equity markets in general deflate? Now above 2.60, what a difference in the last 4-6 weeks from the 1.90 low! Nat gas stocks weak with stock market but in many cases holding up fairly well.

BSing away

Senor

[diogenes227]

Nice move. Who says government regs can't be profitable?

Good luck and good trading.

THE GREEN VERTICAL LINE -- April 18th

THE BLUE VERTICAL LINE -- May 4th

P.S. As for the stocks...

http://stockcharts.c...37194999983.png

[senorBS]

Nat gas stocks are coiled like a spring IMO and if the stock markets are near a bottom like I think they could be, gold and gold stocks too, I think we could see massive rallies in the gassy stocks and they could lead the markt norte. Just an opinion amigos, DYODD as always. BSing away Senor

[dougie]

looks like some more spring coiling

[senorBS]

looks like some more spring coiling

It's all about risk/reward and one's time perspective amigo.

Senor

[senorBS]

looks like some more spring coiling

I now see "uncoiling" everywhere in nat gas stocks, it's norte time

Senor