Gas Production Expected To Ramp Up In 2010: Shale Plays In America Having Increasing Rig Counts
January 5, 2010 - The Wall Street Transcript has just published Oil & Gas Production and Distribution Report offering a timely review of the Energy sector. This Special Report contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. Please find an excerpt below.
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WILLIAM R. FERARA is a Director in corporate and government ratings and the Sector Specialist for the integrated gas team of the utilities and infrastructure group within Standard & Poor's, based in New York. The integrated gas team covers the midstream sector, including most master limited partnerships, regulated gas distribution companies, gas storage projects and pipeline companies. Prior to assuming the role of Sector Specialist in October 2007, Mr. Ferara was based in London since 2003 as Deputy Team Leader for Standard & Poor's european utility team. Mr. Ferara has been a member of Standard & Poor's utility and energy teams since 1997, after originally joining the company in 1995. He holds an MBA in financial management from Pace University and a bachelor's degree in finance from Manhattan College.
TWST: I know you look at this from the credit side. What's going on in this space from your perspective at this point?
Mr. Ferara: The biggest issues right now for the natural gas space is, on one hand, you have the supply/demand structure, whereby you clearly had a decline in prices sustained for a number of quarters. And that has resulted in a lot of producers laying down drilling rigs, which leads to less of oil gas supplies. On the other hand, because of macroeconomic conditions, you have systematically less demand, primarily from a lot of the industrial companies as well as power generation facilities. So you really have a situation where demand is declining and the decline in production has not kept up at the same pace; so you've also seen lower gas prices as an effect. Gas prices bottomed to some degree late this past summer, but we're still generally well below historical averages.
TWST: Are we getting close to a balance here?
Mr. Ferara: It seems as if we could be getting a little bit better, although gas prices have been very volatile lately. The natural gas forward curve is back well into the $5 range for next year, so that's a bit better. What we're looking to see, and what a lot of the market is looking for, too, is to see how we come out of this upcoming heating season, which essentially has really just begun.
Over the next few months, we'll see the range of basis spreads throughout the country, the level of gas prices and their outlook for 2010, where gas production is expected to ramp up and whether it will continue to remain strong in the various shale plays within the country, and how production reacts in the more conventional traditional drilling basins, which on average have higher cost structures.
TWST: What's been the disruptive factor here? Has it been these new shale plays?
Mr. Ferara: That's certainly been a wild card in the mix, in so much as there are new plays which have seen some pretty good production figures. But obviously they're rather new, so they don't have a substantial track record. At the same time, some people thought a lot of LNG would be coming to the country, but at this point it has not. So I think you had a lot of things come into play with the economy, with the credit markets, with fundamental demand and supply not being able to be taken offline quick enough. So we've seen a really sharp decline in gas prices.
TWST: As I remember, a year or two ago there was going to be a big influx of LNG and it hasn't happened. Is that because of the economy or are there other issues?
Mr. Ferara: No, LNG is a commodity sold around the world. But something we focused on, and which has been the case, is that gas prices have simply been higher in Asia and most of Europe. In those countries, natural gas prices tend to be based off of crude oil prices, which continue to trade relatively high. So comparably, an LNG seller would do far better selling to those markets than they will to the U.S. So it's really just come down to a competitive standpoint, whereby gas prices are not high enough here in order for the seller to be willing to sell their product here.
TWST: So they go where the price is right.
Mr. Ferara: Yes, certainly from a merchant basis they do. Obviously contractual situations are different, but from a merchant perspective, LNG has not been the best play right here in the U.S. of late.
TWST: Does the industry get through this tough period without much disruption?
Mr. Ferara: I don't think that will be the case. At least in the midstream energy sector, there have been some companies which are slightly more exposed to commodity prices, which have experienced some weakness. However, most companies have hedged their future cash flows by selling their capacity, whether it be on pipelines or processing activities on a for-fee basis.
So a lot of it comes down to the strategy of the company in so much as what percentage of their cash flows they desire to be at risk, and the degree to which they can benefit from a strong environment. Some of the smaller entities have not hedged as much, could be experiencing greater liquidity concerns than some of their larger peers, and which may suffer from deteriorating fundamentals a little bit quicker in a down market.
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