Natural Gas Prices on the Rise!

It looks like natural prices are on the rise again.   Will the prices continue to rise now leading into cold weather months?

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Permalink Reply by Summer Johnston on September 29, 2014 at 1:19pm

 Will the prices continue to rise now leading into cold weather months?

Lotta signs on the farm of an impending cold winter.

Permalink Reply by Jack Straw on September 29, 2014 at 3:06pm

I hope that you are not basing your optimism on the commonly quoted NYMEX Henry Hub prices.

 

The Marcell & Utica are a long way from Henry, Louisiana   …. both in distance and pricing.

 

From ICE Day Ahead Natural Gas Price:

 

Henry Hub                      $4.0171

Leidy-Transco                $1.9078

TGP-Z4 Marcellus         $1.8351

Dominion-North           $1.9045

Dominion-South           $1.8912

 

Marcellus/Utica ….. where you are lucky if you get 50 cents on the dollar.

 

Source: http://www.naturalgasintel.com/ice

 

All IMHO,

                   JS

Permalink Reply by farmgas on September 29, 2014 at 4:09pm

Jack...I`m a glass half-full type of guy.  I, like many landowners cling to the hope and promise of better days ahead.  After-all, we realize that we have absolutely no influence over the prospects of receiving gas royalties or not.  We are at the will of gas companies who decide our future.  Do not the gas companies have contracts based upon hedge funds which are generally above $4?  Thanks for keeping us all informed...

Permalink Reply by Jack Straw on September 29, 2014 at 4:43pm

It is a complicated system; one that is complicated by design; and I assure you that it was not designed for the benefit of the Royalty Holder.

Last Winter, the spot market at some of the City Gates in the Northeast on certain days hit ridiculous numbers … but did any of the Royalty interest holders get a piece of that (hint: the answer in NO).

I anticipate a repeat during the upcoming Winter .... and likewise, I do not expect the Royalty interest holders to be taken along for that ride. Oh ... they will be taken for a ride; but not the one they are hoping for.

 

The upstream Oil & Gas Operators sell the Natural Gas forward to their Mid-Stream subsidiaries.

The upstream Oil & Gas Operators sell this Natural Gas at a low price; with inflated marketing and distribution costs that the Mid-Stream subsidiaries charge back to the upstream Oil & Gas Operators …. they rob Peter to pay Paul … and, Paul does not pay royalties …. revenues which otherwise would go to the upstream Oil & Gas Operators (a share of which would be due Royalty holders) instead are booked by the Mid-Stream subsidiaries.

If what I am describing sounds a lot like the classic ‘Shell Game’; that is because it is a lot like the classic ‘Shell Game’. The ‘House always wins’ …. because the house makes the rules. OBTW, Peter and Paul are Siamese Twins; co-joined at the hip (the one containing their wallets).

 

If this seems to be a cynical description of how things work, the reality is that the full truth is even worse. In making the above description suitably simplistic, I have left out a lot details of the others bits of ‘creative accounting’ that take place in minimizing royalties, minimizing taxes … while at the same time maximizing profits.

 

All from my personal knowledge and experience,

                                                                                            JS

Permalink Reply by Jack Straw on September 30, 2014 at 9:26am

RE: "Do not the gas companies have contracts based upon hedge funds which are generally above $4?"

You are confusing Hedge Funds with the act of hedging forward production. The act of hedging future production is not  necessarily associated with a Hedge Fund.

Hedge Funds are financial entities, the name "Hedge Fund" refers to the techniques traditionally used by hedge funds, but hedge funds today do not necessarily hedge. They tend to be leveraged; often highly leveraged.

O&G companies often (for a variety of reasons) sell future production ... a procedure referred to as hedging.

One reason to hedge is to meet the requirements of a lender; a lender might insist that sufficient hedging is done to guarantee future repayment of a loan. Another reason to hedge is to assure sufficient cash flow will be available to cover anticipated operating costs ... to assure solvency in an uncertain future price environment.

Right now, I would expect any Natural Gas from Marcellus/Utica producers to be hedged at amounts very much lower than $4.00. If you have production in East Texas, you might be able to hedge at $4/mcf; in the Marcellus/Utica. you might get $2/mcf.

Looking at NYMEX Henry Hub pricing, while living in the Marcellus/Utica, is meaningless.

All IMHO,

                 JS  

Permalink Reply by Jim Litwinowicz on September 30, 2014 at 3:13pm

farmgas; hedging is educated guesses and river boat gambling.  A few years back, the E & Ps made big bucs on their hedged positions because gas prices fell further and faster than expected. Companies had prices locked in at the higher prices that most people had expected. At least one company made more on the hedged contracts than on what they actually sold. Easy to do when prices plummet unexpectedly

Now prices are low and expected to remain low for some time, albeit with occasional seasonal spikes. When every one expects prices to remain low, they will not buy future contracts at higher prices.  That means that the E & Ps will not be able to make a lot of money by selling future contracts at high prices. In fact, many of them were locked into contracts at prices lower than what occurred during last winter's and they left a lot of money on the table.

Hedging allows for price stability for companies but can also be very frustrating.

Permalink Reply by farmgas on September 30, 2014 at 5:46am

Jack....When Consol CNX Gas and Noble Energy formed a JV, I read that a part of the agreement called for Noble to share cost for drilling if the average price of NG was $4/mmBTU for a 3 month period based upon NYMEXHenry Hub prices.   Do you know if this is accurate, and if so, watching the trending of price on the NYMEXHenry Hub has validity.  Do other gas companies use this pricing for decision making, too?

A second note from the agreement called out for Noble Energy to develop the wet gas areas of Consol`s leases and Consol will develop the dry gas areas, specifically SW PA including Westmoreland and Indiana Counties in PA.  Is this plan still working, and if so, Consol should be able to develop the less productive dry gas areas more quickly then thought earlier.  Is this a correct assumption?

As always, thanks!

Permalink Reply by Jack Straw on September 30, 2014 at 8:49am

RE: "When Consol CNX Gas and Noble Energy formed a JV, I read that a part of the agreement called for Noble to share cost for drilling if the average price of NG was $4/mmBTU for a 3 month period based upon NYMEXHenry Hub prices.   Do you know if this is accurate, and if so, watching the trending of price on the NYMEXHenry Hub has validity."

I do not know if this is accurate.

If watching the trending of price on the NYMEX Henry Hub has validity, it is only valid as a trigger for Nobel Energy with respect to details contained within their cost sharing agreement with Consol.

For those of us in the Marcellus/Utica, I see NO value in watching the NYMEX Henry Hub price; as none of our Natural Gas ever see the Henry Hub.

The only valid hub is the one our Natural Gas individually goes into; and the amount we receive is currently a number that is a fraction of Henry Hub pricing. Looking at the Henry Hub price is both misleading and frustrating; it is simply a representation of what we might someday achieve when infrastructure is better developed, a better regional market develops and regional supply and demand reach a closer equilibrium. 

RE: "A second note from the agreement called out for Noble Energy to develop the wet gas areas of Consol`s leases and Consol will develop the dry gas areas, specifically SW PA including Westmoreland and Indiana Counties in PA.  Is this plan still working, and if so, Consol should be able to develop the less productive dry gas areas more quickly then thought earlier.  Is this a correct assumption?"

No, I do not believe that this is a correct assumption. My understanding is that in return for a 50% working interest in Consol's extensive acreage, Noble will 'carry' Consol's costs.

Currently, with low +/-$1.80/mcf Natural Gas pricing in the Marcellus/Utica .... dry gas is not economic .... and Consol do not likely see value is drilling the dry gas areas (except the known very most prolific ones) until pricing makes the current uneconomic dry gas areas profitable. Consol are not running a charity for the benefit of those of us in the dry gas area; they will focus on the wet gas areas where a profit can still currently be made.

Consol will likely do some limited drilling in the dry gas areas to evaluate the (future) potential of particular areas and to hold acreage. They might develop a pad capable of hosting six or eight wells; but drill and complete only one well to 'prove up' the area. ... and that one might undergo production testing, and then be shut in until the pricing environment justifies returning and drilling out the pad and putting in a gathering line.

Consol are in the business of making money for their shareholders; they are not in the business of drilling uneconomic wells .... simply for the sake of drilling.

Normally one would expect a company to borrow money to fund their drilling program; Consol took another tact .... exchanging 50% of their acreage situation with Noble Energy .... in exchange for having their drilling costs carried by Noble ...not being party to the complete specific terms and conditions of their agreement, I cannot say how this is currently working out for Noble and I cannot say how this is currently working out for Consol. In spite of having their drilling costs carried by Noble; it is still Consol's fiduciary duty to their shareholders to obtain the most return for every dollar Noble spends.

OBTW ..... Consol and Noble Energy have a created a mid-stream subsidiary cutely named CONE.

You can expect to see a bit of creative accounting as profits get transferred from the Upstream (where the royalties are paid) to the mid-stream and the down-stream (this will not be to the benefit of the royalty holders).

All IMHO,

                   JS

Permalink Reply by farmgas on September 30, 2014 at 9:55am

I recently read that Consol has reduced their operating cost per Mfc down to $2.  If I understood their report correctly and judging from these various prices, they and other gas companies aren`t going to be drilling many wells too soon for dry gas.  What do these prices need to rise to become profitable for drilling? 

Permalink Reply by Jack Straw on September 30, 2014 at 11:48am

RE: "What do these prices need to rise to become profitable for drilling?"

My opinion .... some uptick in activity in the dry gas areas if Natural Gas prices (PA Hubs, NOT Henry Hub) average $5/mcf over an extended (at least 6 month) period..... serious activity would require Natural Gas prices (PA Hubs, NOT Henry Hub) average $6/mcf over a one year period.

Drilling budgets for most sizable companies are typically planned in the fall and carved in granite by late November; this might be reviewed several times during the year.

Scheduling a rig takes advance planning, site preparation, permitting, obtaining tubular goods, obtaining and scheduling sub-contractors, etc.  

Once a decision has been made to enter (or re-enter) an area, there is a substantial amount of time which will elapse before any wells are drilled and completed.

My guess ..... things will start popping 2017, at the earliest (more likely 2018-2019).

I hope that I am not being too pessimistic.

I really hope that I am not being too optimistic.

I am just trying to be realistic.

All IMHO,

                  JS

Permalink Reply by farmgas on September 30, 2014 at 12:53pm

Jack...Would NG produced by Consol in the Westmoreland, Indiana and Jefferson counties be directed into the Dominion pipelines heading to Renova which would be covered by Leidy-Transco hub pricing?  If so, only this hub will be important to follow for Central PA development potential,  right?   What will influence greater gas demand at the Leidy/Transco area to increase price levels?   Thanks!

Permalink Reply by Jack Straw on September 30, 2014 at 4:08pm

RE: "Would NG produced by Consol in the Westmoreland, Indiana and Jefferson counties be directed into the Dominion pipelines heading to Renova which would be covered by Leidy-Transco hub pricing?"

Yes

RE: "If so, only this hub will be important to follow for Central PA development potential,  right?"

Yes, it is that simple.

RE: "What will influence greater gas demand at the Leidy/Transco area to increase price levels?"

A number of possibilities:

Startup of DOMINION's Cove Point, MD LNG export facility. One would expect Dominion to send gas from Dominion Hubs to Dominion's LNG facility.

Interconnects and new pipelines that would get Leidy Hub Natural Gas to new markets (such as the New England States, Eastern Canada or Chesapeake Bay Refineries ..... refineries preferentially use natural gas as a fuel and in processes ... another way cheap Natural Gas can displace expensive Oil).  

A resurgence in industries that use natural Gas as a feedstock. Many of these industries moved overseas to countries with lower labor costs ..... lower feedstock costs and the efficiencies inherent in a U.S. workforce can reverse the simple benefits presented by lower wages elsewhere.

None of the above possibilities will happen overnight .... 2017?, 2018?, 2019?

I assure you that I am as impatient as everyone else.

I am old enough that I understand that I am past my "Good By Date" and my "Expiration Date" is approaching .... I am hoping to still get "a piece of the pie" before I head up into the sky.

  

All IMHO,

                       JS

 

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