Less Natural Gas Drilling, More LNG Imports? (BHI, LNG, BP, CHK, XTO)

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We’ve been closely tracking the weekly rig counts published by Baker Hughes Inc. (NYSE:BHI) for a while now. Drilling for oil has slowed significantly in the US, and drilling for natural gas has slowed even more. A year ago, Baker Hughes counted 1,227 gas rigs; last week, there were just 810, a drop of 44%. The biggest drop came in vertical rigs, with horizontal drilling off much less. Horizontal drilling is common in the shale gas plays such as the Barnett and Haynesville shales, and tends to drain the reservoirs more quickly than traditional vertical or directional drilling.

That’s one reason why the natural gas inventory numbers are growing. The other reason, of course, is that less gas is required because US industries are using less as the economy shrinks. At least one analyst thinks prices for natural gas have hit bottom and will begin to rise as economic activity picks up. But the price for that gas will range from $4-$6 per thousand cubic feet, a far cry from the $10/thousand cubic feet of a year ago.  According to Platts, the Oppenheimer analysis concludes that gas prices could stay low due to LNG imports. The CEO of one US LNG importer, Cheniere Energy Inc. (AMEX:LNG) warns that US storage facilities may be unable to accept the volume of LNG that could be headed for the US.

Global production of LNG is expected to rise in 2009 even though the global economy is drying up demand for natural gas. This situation should only lower prices, and the abundance of LNG will put even more pressure on domestic US natural gas producers. As Cheniere’s CEO puts it, domestic gas production is “not rational” at prices lower than $4/thousand cubic feet. He did not note that neither is LNG production.

And LNG prices are falling. Platts also reported that spot prices in Asia have hit $4.30/thousand cubic feet. A shipping delay from an Indonesian LNG plant owned by BP plc (NYSE:BP) could help the over-supply picture, but a Chinese buyer of LNG has stopped purchases and is unlikely to purchase another spot cargo until Chinese demand picks up.

India is still buying LNG, but is bidding just $3.85/thousand cubic feet. That’s barely a dime higher than NYMEX natural gas futures.

The short version of all this is that until the global economy picks up, natural gas prices will stay low and that competition in the US from LNG imports will play an increasingly important part in future natural gas prices. Companies like Cheniere, which is up more than 400% from its 52-week low of $0.95, could benefit in the near- to medium-term. Gas producers like Chesapeake Energy Corp. (NYSE:CHK) and XTO Energy Inc. (NYSE:XTO) appear to be facing increasing price pressure.

Paul Ausick
April 3, 2009