Natural gas spot prices continue to hover near multiyear lows, putting increased pressure on natural gas producers as revenues sink.
Although rig counts have been falling for years, a handful of rigs continue to disappear each week. The natural gas rig count is down to just 193 as of mid-November, down by nearly half from this point a year ago. To make matters worse, oil rigs are also vanishing, so the associated natural gas that is produced in conjunction with oil is also starting to tip. Natural gas production nationwide was down 0.2 percent for the week ending on November 18. Taking the past few months into consideration, it appears that total U.S. natural gas production has peaked for now (see graph). Both crude oil and now natural gas prices are too low to sustain such heady levels of growth.
But the sudden halt to production growth has yet to translate into price gains. In fact, natural gas prices have fallen much more quickly in recent months. Related: Poor Quarter for Canada’s Oilfield Services
Henry Hub spot prices dropped below $2.10 per million Btu on November 20, near the lowest levels since 2012. That is sharply down from the levels that Henry Hub traded over the summer, near $3/MMBtu. Mild temperatures in the Northeast has kept a lid on demand, causing prices to fall. And the El Nino expected this winter could lead to mild conditions throughout the Northeast and Midwest, which is also pushing down prices.
But the larger reason that prices are getting crushed is because of the rising levels of natural gas diverted into storage. Just as many analysts are watching crude oil storage levels as a sign of oversupply, natural gas inventories are also building up. For the week ending on November 18, natural gas storage jumped by 15 billion cubic feet, bringing total levels above 4,000 Bcf for the first time ever. Related: Energy Storage Tech Finally Starting To Compete With The Grid
Normally, at this time of year, natural gas storage is drawn down. Inventories go through seasonal changes – supply gets put into storage in the summer, and then burned during cold winter months. However, net storage continues to climb through this month. Storage is now five percent above the five-year average.
Ultimately, just like oil markets, natural gas production will have to continue to decline in order for prices to see a rebound. As production falls, inventories will be used, burning off the excess. But if mild temperatures persist and production does not fall significantly, prices will bear the brunt of that, remaining low through next year. Goldman Sachs predicts that natural gas prices could average $2.85/MMBtu in 2016. That is very low by historical standards, but given the current state of affairs, the investment bank also cautions that the risk could be that the estimate is too high.
In the interim, natural gas producers are getting slammed by low prices. Look no further than Chesapeake Energy Corp., the second largest producer of natural gas in the United States, but also the second largest issuer of junk debt among energy companies. The value of the company’s corporate bonds have crashed since the start of the year, falling to record lows on November 19. Bloomberg notes that Chesapeake’s bonds are losing favor among investors, and they were the second most actively traded notes on the high-yield market last week. The only company to see more trading activity was the Brazilian state-owned oil company Petrobras, the most indebted oil company in the world. Chesapeake’s share price dropped to its lowest level in more than 13 years, and fell by more than 15 percent over the course of last week alone.
“We are seeing investors capitulate to the reality of the situation,” John McClain of Diamond Hill Capital Management told Bloomberg in an interview. “They have a lot of debt, they are burning through cash and their earnings profile is not getting any better. They are trading worse than their credit rating suggests, and there is almost certainly a downgrade coming.” Investors are increasingly concerned that they too might be burned by Chesapeake.
But there is little room for a turnaround. With natural gas prices likely staying low for the foreseeable future, producers will continue to feel the pain.
By Nick Cunningham, Oilprice.com
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