Natural gas companies cannot survive by losing money

20 Nov 2012 by Jim Fickett.

Setting aside all the more technical arguments I and others have made about natural gas, the most fundamental reason the market balance must change is the one given in the title above.

Just about everyone in natural gas has been losing money. And most are now admitting it and doing something about it.

From GCAPTAIN last June:

Even energy titan Exxon Mobil Corp. (XOM) is showing signs of strain from low natural gas prices.

On Wednesday Exxon Chief Executive Rex Tillerson broke from the previous company line that it wasn’t being hurt by natural gas prices, admitting that the Irving, Texas-based firm is among those hurting from the price slump.

“We are all losing our shirts today.” Mr. Tillerson said in a talk before the Council on Foreign Relations in New York City. “We’re making no money. It’s all in the red.”

His comments mark a departure from remarks made earlier this year on how lower natural gas prices hadn’t yet hurt the company because of its operational efficiency and low production costs. …

Exxon’s $26 billion acquisition of XTO Energy in 2010 made the company the largest producer of natural gas in the U.S.; among U.S. integrated oil companies, it’s the one that’s bet the most on the value of unconventional natural gas production.

People do eventually stop activities that are losing them money, so drilling has dropped dramatically, and Goldman Sachs now predicts that gas production growth will finally stall in 2013:

Prices fell below $2 per m British thermal units in April to the cheapest in a decade. On Tuesday Nymex December gas was $3.807 per mBtu, up 2.4 per cent on the day and 100 per cent from the market bottom. …

Analysts at Goldman Sachs estimate production growth will stall in 2013, acknowledging in a report last week that the “drilling response to the low prices this year has been more aggressive than we previously expected.” The bank raised its gas price target to $4.25 per mBtu in 2013.

So GS thinks the price will rise to $4.25 in 2013. According to Encana's latest company presentation,

Natural gas prices will need to range between $4.00 and $6.00/MMBtu to provide acceptable returns for producers and enable demand growth

We're getting there, slowly but surely.