Conspiracy Theory - the REAL reason for low natgas prices.

OK, now that I've got your attention, I'm MOSTLY kidding.

However, I wonder how much the following has to do with low natgas prices.

The bigger, more well funded natgas production companies decide to keep going full bore even as prices slide to drive gas prices down. What are the advantages to doing this?

1) Kill off the competition. Especially if you're cash rich and your competition is cash poor or has loans coming due sooner than you do.

2) Pushing the gas price down will make it harder for the competition to borrow money.

3) Buy out the competition.

4) As the competition stops drilling, put the screws to your rig suppliers and other suppliers who are hurting for business. Get long term contracts at low rates, or buy equipment cheap.

5) Drive down leasing costs.

6) Build up your own inventory of wells and leases.

7) Whine to the public and the government that you aren't earning any money. Show it in your financial statements.

8) Get people to convert to using natgas instead of alternative fuel sources.


Then once the competition, suppliers and mineral interest owners are sufficiently beaten down, let prices drift back up. Point out high decline rates in the shale plays, etc.

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Mac,

You sure you're not reading all this straight out of CHK's playbook ?
Except there have been no major M&A deals and prices have been down for a long time now. Stocks are actually up from their lows several months back so maybe the plan worked too fast??

Maybe people keep producing because the pimple faced kids on Wall Street want companies to show growth...growth in production and reserves. In order to do that, you gotta keep drilling. Woe be the company that doesn't show growth in production and reserves! They get hammered on Wall Street.
Mac, as Mmmmarkkk says - publicly owned companies need to continue to show growth or at least maintain earnings. Leases are expiring and have to be drilled to hold. Some evaluation drilling is required to further delineate play boundaries and assess variations. This will position companies for future increased development activity. Companies have certain resources (personnel, rigs, etc) that are fixed costs so need to be utilized. Significant gas volumes are hedged at substantially higher gas prices.

So no great mystery - just trying to generate cash.
Mac, while I don't think there is any conspiracy. :)

You have hit the nail on the head for the collateral damage involved. And your right, some people aren't complaining quite as much as others.
I think some of the continued drilling is momentum. Financing gets arranged, deals get struck way ahead of time.

After the price crash, you may find that

1) It costs to turn the deals off.

2) The person in control of turning the deal off doesn't save any money by stopping the deal. He may be bankrupt either way, so he keeps hoping for a miracle.

3) The person in control may may money by drilling anyway. Hey may get paid simply for drilling, someone else gets the money from actual production.

4) You've invested so much in permits, leases, etc. that you don't want to stop.

5) The mineral owners now realize you screwed them last time, and you need to keep the leases from expiring because you won't be able to screw them the same way again.

6) Your financing is going to run out and it will be harder to get new financing.


Grillin, just because the stock prices have come up doesn't mean the companies won't get into a financial bind in the near future. They may have cash crunches and debts coming due at some time in the future.

Unfortunately, company acquisitions don't get done on a simple "buy the stock" basis, the boards get involved. Sometimes you have to wait until the board gets desperate enough before you can acquire a company. Look at Yahoo/Microsoft. Yahoo stock is now at half the price Microsoft offered.


BTW, I doubt that ABC petroleum and XYZ Gas ever met in a smoky room and formally plotted this out. It's entirely possible that XYZ tries to guess what ABC's strategy is and decides it comes out better if they mimic their strategy.
Mac - I thought you told me not to be suspicious when I was rummaging around for info about SE & FC accounting methods???? Now you plant this seed, the Wal-Mart effect??? lol

How about hold prices down to make ng more attractive against other fuels so it can increase its postition in the markets (electric generation, industry, residential)? Especially while somebody somewhere is trying to decide what to do about cap & trade.

:0)
SE vs. FC accounting is a way to cheat the stockholders, investors, and the tax man. I think almost all mineral interest payments are already FC, and will continue to be FC. Other methods are used to cheat the mineral interest owner.

;-)
One word answer: Technology. Same thing helped us solve the oil shortage back in the 70's.

In the 70's the invention of electronic fuel ignition effectively doubled the worlds oil reserves. Cars with carbaretors got 8 miles a gallon. Cars with EFI get 16+ miles a gallon.

This time it was the development of horizontal drilling with multi-staged fracs to exploit the massive shale fields. Risk has been minimized.

You can sprinkle in cool summers, warm winters & the fragile economy, but they are minimal players.

Technology allowed us to drill ourselves out of a boom.

TMB


Summary
Working gas in storage was 3,458 Bcf as of Friday, September 11, 2009, according to EIA estimates. This represents a net increase of 66 Bcf from the previous week. Stocks were 496 Bcf higher than last year at this time and 487 Bcf above the 5-year average of 2,971 Bcf. In the East Region, stocks were 153 Bcf above the 5-year average following net injections of 45 Bcf. Stocks in the Producing Region were 261 Bcf above the 5-year average of 849 Bcf after a net injection of 11 Bcf. Stocks in the West Region were 72 Bcf above the 5-year average after a net addition of 10 Bcf. At 3,458 Bcf, total working gas is above the 5-year historical range.
I heard some discussion on TV the other day suggesting that hedging had a lot to do with it. If you're hedged to sell natgas at $6, it doesn't matter that the spot price is $3.

Something doesn't quite seem right about this argument to me, since you should be able to sell your hedge without producing the gas yourself, but maybe it "flows down the chain" of people selling and buying hedges and does encourage actual production somehow. Or somewhere along the chain, it makes sense for tax purposes or window dressing for the financial reports.

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