In recent weeks the prices of natural gas has changed direction and declined. The current price is still higher than the price of natural gas during the same time last year. Will natural gas continue to fall and perhaps even reach a lower rate than in 2012? How will another year with historically low natural gas prices affect leading oil and has companies such as Chesapeake Energy Corporation (NYSE: CHK) and Chevron Corporation (NYSE: CVX)? Let’s examine these questions in further detail.
During the winter, when the demand for natural gas in the residential and industrial sectors tends to rise for heating purposes, the price of natural gas is expected to increase. Instead the price of natural gas decline during December. What could cause natural gas prices to keep falling in the weeks to follow? At least three factors come to mind:
- Warmer than normal weather: in recent weeks the temperatures have fallen precipitately mainly in the Northeast – one of the leading regions that uses natural gas. But the current forecasts suggest this winter might be warmer than normal. If the winter will eventually turn out this way, this could lead to drop in the demand for natural gas. This, in turn, will pressure down the price of natural gas. During November and December the storage extraction from the natural gas storage was much lower than the five-year average. If this trend will continue, it will suggest the demand for gas is lower than in the past.
- Higher than Regular Storage: The current natural gas storage is nearly 10.7% higher than the five year average. This means, the storage is already high for the season and thus cuts down the pressure form the supply side for the price to rally;
- Production is still low but is picking up: the natural gas rig count rose in recent weeks by nearly 10 to reach 439, based on Baker Hughes. The rig count is still very low compared to last year by nearly half. But if the rig count will slowly rise, it could suggest the production is slowly recovering.
Let’s examine how the price of natural gas could affect major oil and gas companies.
During 2012, the price of natural gas tumbled down to an annual average of $2.74/mmbtu, which is nearly 32% lower than the average price of natural gas in 2011; back then the price was $4.01 mmbtu. This tumble has adversely affected the revenues growth and profitability of some oil and gas companies. The company that suffered the most from this tumble in natural gas prices was Chesapeake. For this company, natural gas accounts for nearly 50% of its total revenues. Therefore, during 2012 (the first nine months) the company’s operating profitability (excluding unusual expenses and revaluation of assets) reached 13.1%. In comparison, the company’s profitability in 2011 was 21.7%. On the other hand, more oil oriented companies such as Royal Dutch Shell (NYSE: RDS-A) or Chevron seem to be less affected by the drop in natural gas prices as these companies’ profitability remained nearly unchanged: during the first nine months of 2012 Shell’s profitability reached 10.9% and Chevron’s was 18.9%; in 2011 Shell’s profitability was also 10.9% and Chevron’s reached 18.8%. This means, if the price of natural gas will remain in 2013 as low as it was in 2012 this will mostly adversely affectChesapeake. This will have a lesser effect on Shell or Chevron.
Therefore, if the price of natural gas will remain low in 2013 Chesapeake will continue to suffer from this situation. The type of winter the U.S will have is the key factor in determining the direction of natural gas, but based on the current higher than normal storage levels and late withdrawal from storage for the season, it seems natural gas will remain low and won’t reach the $4/mmbtu mark.
For further Reading see:
- Will Oil Continue Its fall?
- Is Chesapeake walking towards the right path?
- Why the Recent Rally in Natural Gas won’t help XOM
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