In this post, we discuss EnCana (ECA), EOG Resources (EOG), XTO Energy (XTO) and Chesapeake (CHK).
The Energy Information Administration (EIA) reported today a below-average withdrawal of natural gas for the week ended January 2, 2009. The agency reported that natural gas in storage totaled 2,830 billion cubic feet (Bcf), representing a net withdrawal of 47 Bcf from the preceding week, significantly below the 147 Bcf withdrawn this week last year. Current storage levels are now 31 Bcf or 1.1% above last year's level, and 3.2% above the 5-year average.
This is the first time since December 2007 that storage levels have exceeded year-ago levels. Warmer-than-average temperatures across the country played a major role in the below-average withdrawal. According to the National Weather Service's degree-day data, temperatures in the country were above normal and above the year-earlier level.
This is a bearish report for natural gas prices, adding to the long list of issues weighing on the commodity. Natural gas prices rallied earlier last year, reaching over $13 per million Btu (MMBtu) in July 2008, before trending down. Prices have since dropped sharply to the current level of under $5.50 per MMBtu (we are referring to Henry Hub spot prices here).
Keeping prices low is a combination of soft demand due to the economic downturn and strong supplies due to increased production from a number of unconventional natural gas fields. And unfavorable weather, as during the week in question, does not help either.
While favorable temperatures during the heating season should help natural gas prices to some extent, the overall outlook continues to remain weak. The commodity's weak near-term outlook, coupled with the ongoing credit market turmoil, has prompted exploration and production players (natural gas producers) to curtail capital expenditure plans for 2009. These curtailments are expected to self-correct natural gas' supply-demand fundamentals later this year.
As such, we foresee a much more favorable environment for exploration and production companies towards the end of this year and into 2010. Our preferred E&P names, such as EnCana (ECA), EOG Resources (EOG), XTO Energy (XTO) and Chesapeake (CHK) own quality assets that enable them to cost effectively operate even in a low-price environment. Additionally, these companies have already hedged substantial portions of their expected production levels this year at much higher prices. This significantly lowers their exposure to the current low prices.
Read the full analyst report on ECA
Read the full analyst report on EOG
Read the full analyst report on XTO
Read the full analyst report on CHK
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