An article today titled ‘EnCana hedges about 35 per cent of natural gas production in 2010 gas year’ says “Natural gas giant EnCana Corp. (TSX: ECA) has entered into fixed price hedge contracts on about 35 per cent of the its expected natural gas production and remains pessimistic about prices for the commodity in the short run”.  The hedge applies to about 1.39 billion cubic feet per day of its 2010 natural gas production as is reported to be at an average price of US$6.21 per thousand cubic feet for the 12 month period ended Oct. 31, 2010.  Encana is North America’s largest natural gas producer.

I think this is a transaction that investors ought to pay attention to.  I have always found in my business valuation consulting practice that ‘business operators’ know a lot more about the intricacies of their respective businesses than do consultants (me included), analysts, economists, and pundits.  Considering the NYMEX natural gas future is quoted at U.S.$4.26 this morning as I write this, the fact that Encana’s internal experts have decided to hedge at U.S.$6.21 I think is encouraging for anyone with a vested interest in a prospective increase in natural gas prices – particularly where the referenced article quotes Encana’s President and Chief Executive Randy Eresman as saying “We expect the prices to be between $4 and $8. We will continue looking at adding to our 2010 gas hedge positions as the year unfolds and as opportunities arrive until they are about in the 50 per cent range”.  Encana issued a Press Release with respect to its hedge position yesterday – for full text see StockResearchPortal.com → Company Research → Encana → Press Releases → June 15 – “EnCana extends risk management measures by hedging about 35 percent of natural gas production in 2010 gas year”.

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The following (paraphrased and summarized) is taken from today’s report from Oilwatch Monthly.  Information will next be updated July 15.  ‘Non-OPEC countries produce 60% of world oil production, but the output of those countries is going to ‘fall off its plateau’ in 2010.  More importantly, there currently is an overall decline in investment in oil projects in non-OPEC countries resulting from both suspension and postponement of planned projects.  The results of these things will be large as OPEC gains increasing control and influence over the world’s economy resulting from OPEC, within ‘a couple of years’ being the only group left that can increase oil exports’.  If the commentary in the referenced report is accurate (and I have not independently checked it) it seems to me the implications for the Canadian Oil Sands and natural gas (among other energy sources) may be significant.  The referenced report is replete with charts and data, and I recommend that all readers sign up to this free newsletter and read the report in its entirety.

‘Oilwatch Monthly’ is a free newsletter containing the latest data on oil supply, demand, oil stocks, spare capacity and exports.  I find its narrative and charts particularly well laid out and easy to read.  Readers can view today’s newsletter by clicking here and subscribing to it.  The website is in the Dutch language, the newsletter is in English.  In order to subscribe fill out the name and e-mail address boxes, select ‘Oilwatch Monthly’ from the dropdown, and click the  ‘Schrijf je in’ box.

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Each day we review over 400 articles drawn from over 50 websites and blogs that we have screened for what we see as ‘quality content’ and post over 25 of those articles on StockResearchPortal.com – organized topically by Economic News, Base Metal News, Gold News, Silver News, Uranium News, and Oil & Gas News. These articles are then retained in the website ‘system’ for three days. I then further screen and comment on some of those articles on this Blog.

To benefit to the greatest degree from this screening process readers should consider visiting the ‘Today’s News’ feature on StockResearchPortal.com each day and reviewing the headings of the articles we link to there. Readers can then efficiently link to to, and read, those articles they find of interest. Full access to this feature is available to anyone who visits StockResearchPortal.com – no Subscription sign-up is required.

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An article yesterday says that the number of rigs drilling for natural gas in the United States fell below 1,000 last week for the first time in nearly five years, and that the current gas rig total of 970 is the lowest number of gas rigs since March, 2004.

My Comments:  I think this is a particularly interesting statistic to follow, what with the drop in natural gas prices since last summer.  This reduction may auger well for natural gas prices on a demand/supply basis going forward.  It may not auger so well for seismic companies in the near-term.  I will continue to watch this statistic going forward.

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An article yesterday proclaimed ‘Natural-gas producers’ prospects remain iced-in’.  It begins by saying that “while more than a month of the cold season remains on the calendar, the most lucrative period of increased residential and business heating demand has mostly ended for natural-gas producers, with historically high stockpiles on hand”.

U.S. natural-gas supplies are said to have stood at 2,020 billion cubic feet this past week, or 44 billion cubic feet more than last year at this time, and 24 billion cubic feet above the five-year average.  The article says that companies are drastically slashing their capital budgets for the coming year and shoring up their balance sheets as cash reigns, and that:

•    ”For the most part, what you see happening when you see the cutbacks [is that] people are not drilling as many wells, and so the overall production volume of the country will gradually decline”; and,

•    ”Companies have to cut back if they find the economics on their projects won’t be supported by current natural-gas prices, and that’s the case in many situations today. In addition to that, if they also happen to have a lot of borrowing then they find it to be an extremely difficult time”.

Goldman Sachs is quoted as saying ‘While we are not calling a V-shaped bottom in natural gas at present, we believe we are moving closer to a bottom.’

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An article dated February 3 – click here – titled ‘Natural Gas to Strengthen Position as Hydrocarbon of Choice’ says Oxford Analytica (click here) expects natural gas to strengthen its position as the hydrocarbon of choice, even though the international economic slowdown has shaken the outlook for gas markets.  The article:

•    says until 2008 it appeared future NG demand would grow strongly for the following reasons (1) Gas has relatively low emissions compared with coal, meaning gas is a less risky investment in terms of future emissions legislation, (2)  Gas as a replacement for oil remains a cheaper option, (3)  rejuvenation of the liquefied natural gas (LNG) industry makes gas more widely available and the diversification of gas suppliers enhanced the fuel’s attractiveness as a means of increasing security of energy supply, and (4) the power sector has led the increase in demand for gas reflecting the evolution of combined cycle gas turbine technology.

•    says the outlook for gas has changed, at least in the short term given (1) Europe’s economic slowdown, (2) Asian industrial demand is falling, and (3) in the U.S. the gas market is experiencing strong supply growth on the one hand, and declining demand on the other.

•    concludes that while falling industrial demand for gas will cause prices to fall, those lower prices will also consolidate natural gas’s position as the hydrocarbon fuel of choice, and that lower prices will also spur the development of LNG regasification capacity on ’security of supply grounds’.

Last evening I spoke with the President of a Calgary based gas E&P about near-term gas prices.  He told me as best he knew, while NG prices are very low today (futures are U.S.$4.55 this morning) compared with mid-2008 prices north of U.S.$13.50 last July, most gas analysts were forecasting even lower NG prices by this summer driven largely by continued reduced industrial usage and increasing U.S. supply - see article in today’s Calgary Herald - click here.  He also told me he thought the analysts as a group were overreacting in their pricing views.  That said, based on where I think the U.S. and world economies are headed in the next few months, I have little doubt that NG prices will remain depressed in the near term and perhaps longer.

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An article titled ‘The Case for Natural Gas’ was posted today – click here.  It is a short read that includes charts.  The article suggests that at the current spot price of U.S.$4.30 (versus U.S.$13.00 last July) the a direct or indirect investment in natural gas may be:  “an opportuntity that comes along just a few times in an investor’s life. It might be considered an ideal “long-term investment” with the potential of a “short-term positive surprise”.

The author’s thinking centers on the possibility that natural gas will be the ‘go-to’ fuel for the Obama administration’s efforts to reduce dependence on foreign oil while reducing carbon emissions, and that “Few investment themes in this day and age have such compelling fundamentals. And there are few natural resources more essential to the energy, transportation, food production and security needs of the world than natural gas”.

The author discloses long postions in both the U.S. Natural Gas ETF (NYSE:UNG) and Chesapeake Energy (NYSE:CHK), so his article and conclusions in my view needs to be read with a ‘grain of salt’.  That said, I do think the natural gas spot price bears watching closely.  I plan to comment on it in further posts on this Blog.

The views expressed in this Post are those of the author. They are offered to readers for information and general guidance only. They are neither intended to, nor should be taken to, constitute economic or investment advice. No check of data underlying articles or comments referenced herein has been made, and no responsibility is taken for them.  See Legal Disclaimer.

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