The short-term outlook remains bearish on price even though Canadian producers have managed to slightly increase exports to the US in the mid-west market. Additional supply is coming into the mid-west from the Marcellus and Utica with the rover pipeline now fully operational in June of this year adding an another 1.75 Bcf/day into the mid-west which is already a well supplied market and where most of Canadian gas is exported with no other options. The natural gas futures curve is still in backwardation which reflects a well supplied market despite almost record low storage inventories, the average January 2019 futures contract price trades at a lower premium to the average spot price than last year at this time.
Natural gas shale wells are currently displaying Moore’s Law in productivity rate gains which has significantly increased productivity per well recently, but the decline rates and the reserve life index on corporate reserve reports inversely have been on a steady decline in recent years which means the treadmill of drilling and capital required to deliver a sustaining capex is on the rise. It is also a harbinger of truth that E&P companies to grow can not do it within cashflow and will require significant amounts of capital injections which sets up the next cycle.
The medium-term outlook is very bullish with a market that is currently in a – high supply and high use – cycle, which causes the next cycle – lower supply and high use – creating a new base price in the USD $4.00 to $5.00/MMbtu range with weather dependency spiking the prices higher and lower. It is important to note that the US is now a net exporter of natural gas for the first time! This further sets up the next bullish cycle of – lower supply and high use – which will be caused by increasing LNG exports out of the gulf coast, and increasing exports to Mexico via pipeline and LNG, coupled with the industry Capex decline in 2015 and 2016 to maintain balance sheets during the low prices. Natural gas is also gaining significant market share in the electric power generation market from permanent coal fired generation plant retirements, overcoming the overall losses from renewables, due to carbon emissions intensity that will not be price competition when higher prices return in the next cycle.
The result of these cycles means energy firms need to earn greater equity returns than the corporate buyers they compete against to change their narrative- there are many cautionary tales about the cost of overreaching. Given current asset prices, rapidly changing markets, and the need in many cases to transform the value of assets acquired, few management teams are prepared to take on all the challenges.
Jeffrey Rekunyk is Chairman & Chief Executive Officer P&NG Capital. P&NG Capital provides financial and asset optimization advisory services to the energy industry and investors that includes: reassessment and optimization, mergers, A&D and strategic midstream, combined cycle power generation and energy marketing and trading investments