Will Natural Gas Prices Push $5 in 2013?


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Taylor: Per your outlook on natural gas... you really think prices are going to rise. Is there any specific reason why, in 2013?

Joel: Yeah. Really, if you look at a lot of the production, 2007 was the height and you saw, this year, natural gas prices go below $2. Basically, it was because throughout 2005-2007, everybody was going out and buying the assets because natural gas was worth so much.

When you buy those assets, you have between two to three years to actually start drilling, otherwise you lose the asset, so everybody was going out and hitting all their wells so they could keep their wells and have them held by production, and what happened was oversupply.

Since then, a lot of companies have spent so much money for the land that their balance sheets were not strong. They had to start making money, so they started turning away and moving toward oil.

Now that oil, and a lot of the oil plays, if you look at the Utica and some stuff that's coming out of there now... Also with hydraulic fracturing, the Permian Basin was a dead play for years, and now a lot of these oil plays are coming back online.

The margins that they're making on oil are much greater than you will get at a $4 or $5 natural gas price. What that means is, if you're a company, you're going to keep the wells that you already have and keep drilling for oil, collect the higher margins, and keep all your held by production natural gas on the sideline.

With prices right now at $3.50, you could easily see that move into the $4 or $5 range because production keeps cutting. This year is the first time in history that Chesapeake Energy is going to be drilling for less natural gas than before, and this is happening all over.

You're seeing a lot less production. You're seeing the rig count drop in natural gas. With less production, you see the natural gas prices start creeping up. Also, if you look at a couple of companies, basically you're looking at $6.50 natural gas, to be equivalent to what you'll get in one of the decent oil plays, so if you don't see the price reach there, you're not going to see companies come back in.

You could easily see that price climbing into the $4s, close to $5 this next year. A lot of natural gas people, T. Boone Pickens for one, is expecting that same thing to happen.

What that helps is companies like Ultra Petroleum, that already have the natural gas assets. They drill, they're the low-cost producer, they make money at $3 so if it climbs to $4 or to $5 they're going to be very nice.

Devon Energy, a company I also talk about, 63% natural gas; very little of that's hedged this next year, so it all goes to the bottom line. Chesapeake, a company that I personally would not invest in, also could benefit very much from this because they have all that natural gas and zero percent of it's hedged for next year so going forward, that's all going to the bottom line if natural gas prices climb up.

Taylor: Chesapeake was really one of the pioneers of this land grab. That's why they're so debt-laden, because they did just run out and take on as much debt as they possibly could, to grab this land that you mentioned, to start drilling it even if they weren't going to produce.

Hopefully, moving forward, a lot of companies in the energy space have been hurt by these low natural gas prices, but then you turn an eye to the chemicals industry and they've been huge beneficiaries of these low natural gas prices, especially with natural gas liquids, as a lot of those are their feedstocks.

You look at companies like Dow Chemical and DuPont bringing a lot of manufacturing back to the United States for this explicit purpose. Westlake Chemical was one of the top-gaining companies in the materials sector this year, and they all are looking forward to a bright 2013 because of this.

If you look at the prices of propane and ethane and butane, all really, really low right now, and those are critical components in most of the chemicals and plastics that you see emerging from this sector.

Those are some companies that have definitely been big beneficiaries of natural gas prices, but then you look at the services companies and they've just been really struggling, especially if you look at a Halliburton and a Baker Hughes, who have pretty significant U.S. exposure. With this reduction in natural gas drilling, they really saw some of their stock prices pull back in 2012 with some lower earnings.

Hopefully, moving forward, they'll be able to right the ship. I think they will, especially with a lot of them concentrating more internationally, more in the deepwater space.

Schlumberger is definitely the pioneer internationally, with well over 60%-70% of their revenues coming from that area, and they're also trying to pioneer the deepwater space with the new joint venture with Cameron. That's a 60/40 split; Cameron 60, Schlumberger 40, really pioneering some of the subsea ventures that they're going to be expecting to roll out here in the next few years.

That's something that I've seen in the natural gas dynamic there. Hopefully it comes to find a happy medium, especially with a company like Cheniere starting to export in the back half of 2013, and even on a more meaningful scale into 2014.

The article Will Natural Gas Prices Push $5 in 2013? originally appeared on Fool.com.

Joel South owns shares of Schlumberger, and Halliburton Company. Taylor Muckerman has no position in any stocks mentioned. The Motley Fool recommends Halliburton Company and Ultra Petroleum. The Motley Fool owns shares of Devon Energy, Halliburton Company, and Ultra Petroleum and has the following options: Long Jan 2014 $20 Calls on Chesapeake Energy, Long Jan 2014 $30 Calls on Chesapeake Energy, Short Jan 2014 $15 Puts on Chesapeake Energy, Long Jan 2014 $30 Calls on Ultra Petroleum, Long Jan 2014 $40 Calls on Ultra Petroleum, Long Jan 2014 $50 Calls on Ultra Petroleum, and Short Jan 2014 $20 Puts on Ultra Petroleum. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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