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Permalink Reply by Mattie on August 10, 2009 at 5:51

I've been in the industry for many years and have seen all the models thru my work on both the producer, midstream, and downstream marketing and trading side. While I agree that there will be a big falloff from some of the Texas "Barnett Shale" deliverabilities, plus some of the recent successes in the Fayetteville and Woodford plays, the more conventional plays have depletion rates in the 3-10% range. We will also see a much more open market for LNG deliveries to the U.S. than in the past. While the impact might be less than what some predict, at a minimum, it will tend to put a damper on "peak prices" during high demand - that's assuming the continued development of salt dome storage to "bank" this gas during offpeak European demand.

That being said, I am of the belief that once the full pipeline infrastructure is in place, it will be very easy for CHK, EOG and other big shale players to respond with the drillbit, thus putting an abrupt halt to any long-term rally on natural gas prices - more likely, as forward (futures) prices 1-2 years out show any rise above the $6-7 range, it's difficult for me to believe that these companies won't "leg in" to new hedges in 2010 forward; then, they'll drill up what they need to produce based on a budgeted ROR. Since these shale plays tend to lend themselves to more of a predictable, manufacturing-type process, the companies will "pick their spots" on forward hedging and produce enough to keep their shareholders happy. The only issue for most of these players thru 2010-2011 are expiring leases, and the unknown as to what lease renewals will cost. I would assume that we'll see a lot of vertical or single-leg horizontal completions in order to minimize initial costs to HBP the acreage; then, in 2011 forward, they'll manage the supply/demand equation nationwide - that's assuming that they're smart - it's amazing how "bullish" large producers tend to get when there is any positive news on the market front - to "not hedge" is a big gamble, and some companies have paid a heavy price for that recently.......some of the largest in the business, in fact.

Absent an absolutely huge economic turnaround worldwide, plus some political "hands off" on the O&G taxation issue and/or incentives for NG use under this new "green economy", I remain at best "cautiously optimistic" for 2011 forward, but pretty bearish for the next 18 months - I hope I'm dead wrong!!

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Permalink Reply by Parkdota on August 11, 2009 at 8:57

I would assume if they aren't hedging then maybe that's a good sign of things to come. If they were to hedge right now is there any idea as to what that might be?

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Permalink Reply by Mattie on August 11, 2009 at 10:01

A company's hedge activity will usually show up in the quarterly and annual financial disclosures to shareholders - a large part of their overall forward-looking valuation nowadays alongside their reserve estimates.

Just because they aren't hedging now does not mean that they won't be as soon as there is a reasonable price improvement.

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Permalink Reply by Parkdota on August 11, 2009 at 12:44

Ah, I see.....thanks. I was taking the non hedging talk as a real positive but I guess it can change in a blink of an eye. Also, I wonder if it's somewhat political in the sense that it can be a mind game in order to get the best results for one's own company.

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Permalink Reply by The_Baron on August 11, 2009 at 9:15

I hope your wrong too, but I too am bearish. People have forgoten what it was like in the 80's when low prices and surplus supply triggered mass shut ins.

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