We’ve reached a moment of extreme pessimism among oil & gas drillers.
As Growth Stock Wire readers know, some of the largest, most promising U.S. gas fields have opened up over the last decade. But massive supplies from these fields have driven natural gas prices into the basement. And those low prices are starting to force drillers’ hands…
Right now, we’re seeing a fundamental shift in energy production. It’s one more reason to stick to a plan of accumulating cheap natural gas producers… and shares of income-producing royalty trusts.
Let me explain…
These days, it costs more to drill a natural gas well than what the gas sells for on the spot market. Natural gas drillers lose money producing the gas. So they’re pulling up stakes and shipping their drill rigs to more lucrative opportunities. They’re heading for fields where they can produce higher-priced liquid hydrocarbons, including oil.
You can see this critical tipping point in the following chart…
As you can see, for the first time in 16 years, U.S. oil rigs outnumber natural gas rigs.
In the early 1990s, about 60% of the drill rigs were drilling oil wells. Only about 40% drilled for natural gas. But starting in the mid-1990s, the emerging techniques of horizontal drilling and fracking opened up opportunities all over the continent.[ad#Google Adsense 336×280-IA]Suddenly, every exploration company working in the U.S. was drilling gas… And gas prices were rising, moving from about $2 per thousand cubic feet (mcf) to $4… to $6… and even spiking as high as $10.
That meant more rigs moving into gas fields and away from oil. By 2000, oil wells accounted for less than 20% of the drilling operations. More than 80% of the rigs drilled for natural gas. That ratio hit its extreme in 2005, when just 11% of the drill rigs in North America were drilling for oil.
But demand never caught up to all that new production… When the financial crisis of 2008 hit, the price of natural gas collapsed. It has yet to recover, oscillating between about $4 and $5 per mcf. Meanwhile, the oil price has more than doubled from its 2008 low.
And now, the drilling trend is reversed. A lot of those rigs have left natural gas fields and are once again drilling for oil.
So far, 2011 production is down 7.4% from last year at this time. That puts us on track to produce 24.9 trillion cubic feet of natural gas this year. I expect the number will fall again in 2012.
Meanwhile, consumption is heading in the opposite direction. Last year, the U.S. used 24.1 trillion cubic feet of natural gas. This year, we’ll likely consume between 23.6 trillion cubic feet and 24.6 trillion cubic feet. Assuming a super-conservative rate of growth (about 2% per year), we’ll need almost 27 trillion cubic feet of natural gas by 2015.
This supply/demand imbalance is great news for natural gas investors… and great news for Growth Stock Wire readers who have been following our plan for energy investments…[ad#article-bottom]Over the years, I’ve told you the best way to invest in natural gas is to “hoard” natural gas assets that will appreciate when prices rise… but to make sure to get paid while you wait.
We favor companies like San Juan Basin (SJT)… one of the largest natural gas trusts. Over the last 18 months, SJT’s share price traded sideways with natural gas prices. But that’s no bother, because it’s paying out a rich 7.5% dividend. We’re getting paid to wait for a rally in natural gas prices.
With the natural gas supply shrinking, and with prices already so beaten-down from their highs, we don’t have much downside risk here. And if the supply/demand imbalance pushes natural gas prices up, we’ve got a good amount of upside.
In the meantime, we’re sticking to the plan: We’ll just collect our cash and wait.
— Matt Badiali[ad#jack p.s.]
Source: The Growth Stock Wire