Friday, April 11, 2014

"Cautious Optimism" - Haynesville Shale Word of the Year?

With the natural gas storage withdrawal season now behind us, it is time to reflect on where we are headed in the Haynesville Shale.  Bottom line:  I am cautiously optimistic for 2014.

Back in 2012, we kept hearing analysts say, "wait until 2014" for prices to go back to $4.00 - $4.50/MMcf for natural gas.  Guess what, here we are in 2014 and prices are in the $4.50 range, which many people cite as the magic number to get producers interested in the Haynesville again.  Of course, these prices are driven by a very cold winter throughout most of the country and a record storage withdrawal of 3 Tcf of gas in four and a half months, so it is a worthy question if this is a fundamental change in prices or a reaction to a temporary situation.  But the fact is that now it's mid-April and we have about seven months to replenish approximately 2.6 Tcf to get storage back to a minimum level of 3.4 Tcf.  Doable, but you never know if there will be a hot summer or an unexpected natural event.  In any case, there will need to be strong gas production.

But, curiously, today's natural gas rig count is at a 21 year low.  Sure, there is plenty of associated gas from oil wells (see today's all-time record high oil rig count) flowing to sales, but the back of the envelope says that there needs to be more gas drilling to drive production, especially given the dependence of the gas supply on shale gas wells, which deplete rather quickly.  Where is the production going to come from?  I think there is a backlog of drilled but not completed wells out there, but it won't be enough to drive a ton of production.  There will need to be more natural gas drilling.

Thinking big picture, that makes me somewhat optimistic for the Haynesville Play in 2014.  Looking at recent permit and drilling activity, Chesapeake has been increasing activity in Louisiana for months, and other smaller independents are professing nearly forgotten love for gas.  Former Chesapeake CEO Aubrey McClendon has been saber-rattling about having a mountain of money to invest in the Haynesville dry gas.  Although Anadarko seems to be pulling back a little, others seem to be sticking to a base level rig count.

I get in trouble prognosticating, but I think the number of completions is going to go up in coming months and the rig count is going to creep up a little, but just a little (remember Anadarko seems to be pulling back to offset gains).  As I've said before, when smaller to mid-sized independents like QEP (Questar) start operating again in the Haynesville, then I'll feel better.

I'm feeling pretty good, but the optimism is definitely cautious.

2 comments:

Anonymous said...

IMHO the problem is capital. In a vacuum $4-4.50 is enough to drill in the Haynesville, the problem is that many small/mid size operators have limited capital and with oil at $100 and NLG around $40, the IRRs on these liquid plays are better than the Haynesville at $4.50, also these oil/liquid prices aren't as dependent on next winter's temperatures.

TC

Joel said...

I agree with your assessment of the situation. I'm optimistic medium- to long-term. I really think Gulf LNG exports are going to heat up demand and the transaction costs of moving Marcellus/Utica gas south will be less profitable than just drilling up the Haynesville and moving that gas south to whereever (eg Cheniere @ Sabine Pass, Corpus, etc). Referencing a Platts article I read the other month, I also think Southern US demand will increase in general due to power generation over the next several years (as long as the coal-gas mix is favorable for gas). I think once the larger macro demand drivers are in place, we'll see those smaller E&Ps start to return. In the long-term scheme of things, I tend to lean toward the scenario that we are just wading through the remains of a bust in the boom/bust cycle. There's just too much gas in the ground and too much power demand increase + export demand increase to not be optimistic IMO.