Exploration and production companies have been loading up on natural gas assets in the US for the past several years, and now it looks like that might not have been the best thing they could have done. Five years ago, natural gas prices were around their historical level relative to crude oil, about $1.00 for every $6.00 of the oil price. The ratio reflected the fact that a barrel of oil contains roughly six times more energy than a thousand cubic feet of natural gas. The most recent EIA natural gas report noted gas prices of $7.26/million BTUs, compared with crude oil prices of $18.90/million BTUs. So, what happened? And is it going to continue?
The questions arise from today’s announcement by Newfield Exploration(NYSE:NFX) that it is increasing the midpoint of its 2008 full-yearproduction guidance by 4 billion cubic feet equivalent. Newfield alsoincreased guidance for 2009 by 8%-13% over the new 2008 volumeprediction. The market is not impressed so far: the stock has fallenmore than 11% in early trading.
About 70% of Newfield’s assets are natural gas, mostly in the WoodfordShale play and in the Rocky Mountain region. Like every other gasproducer, Newfield increased its drilling program when gas pricesstarted to jump. Now, production is strong and demand has leveled off.Even the recent Gulf of Mexico shut-ins have not affected natural gasprices much.
As a result, companies like Newfield that predict increased gasproduction are not going to impress investors. An energy analyst atRaymond James has dropped his price forecast for the fourth quarter of2008 to $7.50/thousand cubic feet and to $6.75/thousand cubic feet for2009. The October contract on NYMEX this morning stands at$7.235/thousand cubic feet; NYMEX crude oil is trading at under$105/barrel. That’s a differential of nearly 15 times.
Newfield’s competitors Apache (NYSE:APA), Anadarko (NYSE:APC),Chesapeake (NYSE:CHK), and Devon (NYSE:DVN), among others, are alltrading lower this morning, down about 6%-7%. With the exception ofChesapeake, these competitors hold gas and oil assets in more nearlyequal proportion.
As long as energy prices keep falling, energy stocks are going alongfor the ride. But natural gas players could fall faster and harder.
Paul Ausick
September 9, 2008
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