Commodities expert Robert Raymond reiterated many times on CNBC during 2011 that natural gas was a “chronically oversupplied market,” a trend that will last at least “five to 10 years.” And by the look at last week's lows, he’s been dead on with his assessment.
Raymond, who runs RCH Energy, a hedge fund that specializes in energy-related investments says the issue for natural gas in 2012 will be to see which companies survive.
“Every producer will have to try and survive in a world of low prices, and the high cost producers' equity values will ultimately collapse,” Raymond says.
As we exit the winter heating season in March/April, there will be a record amount of gas still in storage, he says.
“Compounding the problem will be all of the new capacity coming online in the midstream space from the new gas processing plants in places like the Eagle Ford in south Texas,” Raymond says. “Where will all of the gas from these new plants physically go? With storage and line pressures already high, there will be gas-on-gas competition in certain markets.”
The dry gas producer who doesn't have the uplift in value from associated liquids production will be forced to curtail production and drilling, Raymond says.
“This means almost entire basins that are dry gas production like the Haynesville [Shale] and San Juan become irrelevant,” he says. ”It also means dry gas producers in those basins have very little intrinsic value in their reserves.”
As a result, access to capital will become more difficult, cost of capital will go up and drilling budgets will get cut, and production and growth rates will be revised lower — as will cash flow and earnings estimates.
Over the long-term, that will set the bottom of the gas market and after equity values adjust to reflect reality, it will set up a round of consolidation, Raymond says.
“Big guys can apply scale and lower cost of capital, and create value out of assets that the smaller, higher cost and less-well-capitalized producer can't," he says.
In that environment Raymond believes, it will be tough for stock prices to go up.
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