Natural gas futures fell below $3 for the first time in more than seven years after the Energy Information Administration (“EIA”) reported rising supplies. According to today’s weekly Natural Gas Report, U.S. inventories were up 52 billion cubic feet to 3.204 trillion in the week ended August 14. No surprise here.
However, the key data we are looking for in the report is the week over week amount coming into storage. For the week of August 7th natural gas increased by 63 billion cubic feet (Bcf) to 3,152 Bcf for that week so this week’s increase is down 11 Bcf or ~17%.
This decline could indicate that the shut-ins by major natural gas producers may be having an effect. The increase in gas inventories have been projected by many who forecast inventories to reach an inflection point in the August/September time frame and then experience sequential monthly declines. Tristone Capital of Calgary was quoted as stating in a report last month:
“We expect U.S. supply will peak in the next two months and hit an inflection point of sequential monthly declines beginning in the month of August. The drop in supply will begin to accelerate as we enter the heating season, with our expectation that we are down nearly 4 [billion cubic feet per day] year-over-year by the start of winter and the supply shortfall grows to 5.5 bcf/day lower year-over-year by late [in the second quarter of 2010].”
Its never a question of when and if prices go up and down. The key question on every investors mind is “when”? Certainly it would not be surprising if Tristone was off by a few weeks in their forecast. They seem to provide more detail in their analysis then most however it would seem the decline in the weekly increase over the last number of weekly reports would seem to support the forecast time frame. In the short term the real risk is that inventories are reaching their physical capacity which could have further downward pressure on the prices before sequential monthly declines really have an impact. As the saying goes… “Its always darkest before the dawn”.
Note: Watch for a new post on making the bull case for natural gas – coming soon.
So, why is Enerplus investing $444 million dollars into a shale gas play when natural gas prices are in the tank?
Enerplus Resources Fund, a Calgary based oil and gas trust, announced it will pay $406 million USD to Chief Oil & Gas LLC (and its affiliates Chief Exploration & Development LLC and a limited partnership managed by Tug Hill Inc.) for 30% of their interest in the Marcellus shale natural gas play.According to Enerplus, total consideration for the acquisition of US$406 million, comprising US$162.4 million in cash to be paid upon closing, and US$243.6 million to be paid as a carry of 50% of the sellers’ future drilling and completion costs in the Marcellus shale play. ERF.UN (TSX) fell 14 cents to $22.59.
Chief Oil & Gas owns ~72% average working interest in 540,000 gross acres of property primarily in Pennsylvania within the heart of the Marcellus shale zone. Chief is the operator on the prospect. Enerplus will own an average 21.5 per cent non-operated working interest or about 116,000 net acres in the gas fields.
The fast answer is buy low, sell high. As a natural gas trust, Enerplus is a long term investor in natural gas and is simply making an acquisition on the lows looking at the cycles. Many majors understand that low prices present M&A opportunities and attractive returns when viewing the long term prospects for natural gas prices. The major players – producers and institutional investors – will quietly invest in natural gas and start promoting it to the world on the first sign of appreciation. In fact, this acquisition may have brilliant timing if some analysts – like Tristone – are correct in their estimate of natural gas prices firming up in Q2 2010.
