The following news item isn't a great foreshadowing for gas prices going forward:
"EnCana said it had hedged about 1.4 billion cubic feet of natural gas per day at an average price of $6.21 per thousand cubic feet for the next gas year, which runs from 1 November until 31 October 2010. "
If producers are hedging 2010 gas at a little over $6 for next year, things aren't looking great. Of course, that beats the snot out of the sub $4 range we are seeing now. This hedged price is the Henry Hub price so actual field values are going to be lower, depending on the location basis differentials.
Most studies I'm seeing target $5-6 gas (HH) for a decent ROR for HS wells, assuming all of the recovery/rate numbers prove to be true. This should allow HS to continue to move forward, but still not at a break-neck pace. Just a healthly above-average pace, which is pretty darned good!
CB: I have sat through a large number of meetings with various banks, investment advisors, etc. as well as technical folks, economists, etc. An overwhelming majority of folks have looked at the $7-8 figure published by stock analysts and picked it apart as flat out wrong. They did it on financial terms, cashflow terms and technical terms. Again, a huge percentage of those folks come up with $5-6 given the current cost of services, the estimates for ultimate recovery and current offtake rates/pipeline infrastructure. Ben Dell from Berenstein is an outlyer.
Yes, I saw the 20% profit on top of the hedged prices. At $6 HH and a "normal" price differential in North Louisiana, that's probably about right for them. That's a "going forward" economic result I'd probably bet...land/lease cost is 'sunk'. But most of their acreage is "older" acreage so it cost them probably less than $250/acre.
Mmmarkkk, I heard a recent projection by a well known consultant that Nymex (Henry Hub) will stay at ~ $4.00 until mid-2011 when it will rise and stabilize at ~ $6.00 - $7.00. I tend to believe this may be close to the truth with continued near term decline in industrial natural gas demand and record natural gas storage levels. On top of this we are likely to see significant LNG import volumes in 2010.
Regarding Haynesville Shale, most of the studies are way over-estimating the natural gas required to support continued drilling. I have run numbers and believe the required price is much lower.
Les: The numbers we are running for Marcellus and Haynesville are very similar. I can get down to $4 if you consider costs to acquire the leases as "sunk costs". Since the companies have already written the checks for most of the leases, they can't get that money back (other than through tax deductions against other revenue). So, on a "going forward" cashflow basis, the money spent previously on leases shouldn't be a part of the economic decision (again, forgetting about the tax writeoff for a second). Using the current EUR and rate figures as well as current drill/complete/hook up costs, I can make a good 10% IRR case at $4 gas. But that's $4 in North Louisiana. To get to Henry Hub, need to add a bit more, so that gets you into the $4.50 range plus or minus.
I'm not sure about $4.00 through mid-2011. I think more like mid 2010 then a slow rise to $6. But I'm thinking it won't be above $6 for a while. I think we'll continue to see reductions in drilling budgets, more shut in's, etc. Around September, you'll start to see the pipelines restricting flow into the system as there won't be anyplace to move the gas as our storage will be full or nearing full. Storage operators will be reducing flow into their systems as well. All of this back up in the system will cause people to shut wells, reducing their cash flow and their ability to drill. This will take a little while to work through the system but I think mid-2011 may be long. But all of these forecasts and prognostications are opinions...and everybody's got one!
Les b and Mmmarkkk
really appreciate yalls professional insight. i was looking at a price chart going back to the mid-70s and it seems every time NG got too high priced it crashes. the historical data indicates it takes about one year to get back to a moderate level while taking about two years to return to a "good" price. dont the operators put themselves in this situation by over drilling and producing to the point that it gluts the market ? my chart going back to the seventys doesnt account for the looming threat of LNG imports and this may keep the price lower for some time to come, thus making the projection of depressed prices till 2011 more likely than not in my personal opinon.
You have got to be kidding! Do you take working interest in wells? I do. With a $7-$8MM well and an 85% decline rate, there is no way anybody (putting with their own $) would participate at $4, $5, or $6 gas. Work the numbers. I would rather have a CD.
I follow everything pertaining to nat gas. I'm just waiting for these idiots who keep drilling this trend to go bellyup. They keep drilling and dumping more gas on the market, holding prices down. It's an endless cycle. Obviously they have to keep drilling to maintain a positve attitude with analysts to prop their stock up. This will catch up with them if the price doesn't go up soon. Dream all you want, HS needs $7.50 to be profitable. I think you will see $7.50 by late 2010 or 2011.
With than decline rate, what "b" factor do you use in the hyperbolic decline equation? What IP do you start the wells at? We're working off of EUR's in the 7 BCF range. These give us acceptable IRR's assuming costs to drill are in the $8 MM range. We also expect that as more wells are drilled, the cost of each well will go down by a significant %. Its happened in the Barnett, the Fayetteville and the Woodford and so far, its holding up in the HS.
As exciting as this is, we know that we have a responsibility to do this thing correctly. After all, we want the farm to remain a place where the family can gather for another 80 years and beyond. This site was born out of these desires. Before we started this site, googling "shale' brought up little information. Certainly nothing that was useful as we negotiated a lease. Read More