Natural Gas Prices Looking Good Long Term for Producers!

CALGARY -- Is natural gas on the rebound?

It has been such a long time since anyone warmed up to natural gas that we've grown accustomed to view it as a business in blow-down mode, particularly in high-cost Western Canada.

Yet some analysts are beginning to see an end to the two-year downturn that pushed many smaller companies out of business -- and bigger ones to other basins.

Richard Wyman, vice-president and senior oil-and-gas analyst at Canaccord Adams, said the encouraging signs for the Canadian sector include a Canadian dollar that has weakened from its high, a colder-than-expected winter, falling costs for oilfield services and land, and a flattening in drilling in the United States, which should moderate supplies.

"It looks to me that we may be rightsizing this whole thing this winter," he said. "The direction is definitely positive."

In a note Monday, UBS Securities Canada Inc. analysts said: "Sentiments toward natural gas weighted domestic producers appears to be improving, with many names rising off their lows."

"This winter may be the turning point for natural gas prices," Peters & Co. energy analysts said in their recently released North American energy outlook.

"Perhaps the tide is turning for natural gas weighted companies."

There have been some encouraging signs from producers, too.

Last week, BP PLC said it will re-enter the natural-gas business in Western Canada with a $1-billion unconventional gas play in British Columbia. El Dorado, Ark-based Murphy Oil Corp. had just revealed it spent $224-million in December buying up land in British Columbia.

Natural-gas prices have climbed nearly 50% since last year's third quarter, closing Monday at US$8.09 per million British thermal units on NYMEX, up US11.2¢.

Indeed, deep spending cuts by the Canadian sector, in which costs shot up as prices weakened, curbed supplies from Western Canada by more than 500 million cubic feet a day in 2007, and are set to drop by more than one billion cubic feet (bcf) a day this year, says Peters, which has boosted its natural-gas price assumptions for 2008 to an average of US$8.35 for NYMEX.

Brightening the picture for Western Canada is that drilling and completion costs have come down 25% from the peak in 2006, the brokerage estimated.

North American inventories, which for two years seemed to be stuck on full, are deflating.

Storage in the United States is now 221 bcf below last year and about 185 bcf above the five-year average, while a major withdrawal of 225 to 235 bcf is expected to be reported next, which would be well above the year ago the five-year averages, UBS said.

Supporting the optimisim is the LNG story, which is not unfolding as many expected. Imports have trickled down to one bcf/d, from a high of three bcf a day a couple of years ago, as cargoes respond to big demand and huge price spikes in such places as Japan and Spain rather than coming to North America.

"Landed prices into Japan have reached US$21 per million British thermal units in the past week," said FirstEnergy Capital Corp. analyst Martin King in a report Monday. "The global LNG market remains incredibly tight and still undersupplied."

Cameron Gingrich, lead project analyst at energy consultancy Ziff Energy Group, said gas prices in Europe and Asia are responding to the high price of oil. Gas prices in North America decoupled from oil prices two years ago.

Those markets are likely to remain tight in the winter because of heating demand. However, Ziff believes LNG supplies could come back in greater amounts to North America in the summer.

Longer term, LNG supplies to North America are likely to increase as new projects are built in places like the Middle East and Algeria. Meanwhile, Alberta producers are facing higher royalties in 2009, which could make this year's gas recovery short-lived.