Natural gas recovery sparks renewed investor interest

Similar to Sir Laurence Olivier asking Dustin Hoffman in the movie Marathon Man, “Is it safe?” people are wondering if the time may be right to invest in the beaten-up world of natural gas.

Figures just released showing increases in United States supplies of 24 billion cubic feet, compared to the expected 27 billion cubic feet, caused the price of natural gas futures to jump 19 cents to $3.12 US per million British thermal units before later sliding to $2.94.

Natural gas prices, coming off a 10-year low in April, have shot up 30 per cent since mid-June. While most analysts feel it’s too early to dive head-first into the waters of natural gas investing, many sense it might not hurt to start tiptoeing back in slowly.

Historically, natural gas provided 72 per cent of Alberta’s non-renewable resource revenue back in 2002-03, although oil usually received the bulk of investor attention. And in late 2005, the price of natural gas futures on the New York Mercantile Exchange topped $14 per million British thermal units.

Then, the world changed. New fracturing or “fracking” technologies made it easier to extricate gas from shale rock formations, producing an explosion in natural gas supplies and reserves.

The result was that natural gas prices plummeted some 86 per cent, from $13.70 in summer of 2008 to $1.90 in April of this year. Cognizant of the deviation that was occurring between oil and natural gas, Encana Corp. of Calgary split into two separate entities in late 2009, with EnCana surfacing as a gas play while Cenovus Energy was created to handle oil interests.

Now there’s been a bit of a renaissance and hope in the industry, as the price of natural gas rebounded 118 per cent in four months, to reach $4.14 recently, before retreating to the $3 range.

A couple of things are happening to gas supplies.

It has dawned on environmental groups that there’s something other than oil to protest, namely the use of the fracturing process under densely populated areas like New York. Environmentalists will no doubt be up in arms over a sinkhole the size of a football field that occurred in Louisiana just days ago that caused energy companies to purge nearby natural gas holdings, likely producing a temporary glut of supply on the market.

Meanwhile, depressed gas prices caused some companies to switch to handling oil, whose relatively high prices offered better revenue, thus causing natural gas output to slow down.

At the same time, the demand for natural gas, particularly in the liquefied state, is growing. Climate change is producing temperature extremes, requiring a run on heating oil in abnormally cold areas some winters and a thirst for natural gas to supply air conditioning in newly-parched areas of the world some summers.

Peter Tertzakian, chief energy economist with ARC Financial Corp. in Calgary, wrote in a national newspaper that natural gas is beating the pants off coal in energy efficiency. Natural gas is often viewed as safer than nuclear power, after last year’s Japan earthquake and tsunami; more environmentally friendly than coal, and less expensive than solar and wind energy in terms of electrical output.

The increased efficiency of natural gas due to technical advances, plus an abundance causing prices to decline, have combined to woo companies to convert to gas use and startups to use it from the get-go.

Stories are emerging about large oil companies turning their attention to gas fields. ExxonMobil and Royal Dutch Shell are said to be eyeing British Columbia’s natural gas resources and liquefied natural gas terminals up north. Observers are also wondering aloud whether the B.C. assets of firms like Encana and Talisman Energy, or perhaps the entire companies, could be coveted by oil giants.

While supply and demand continue to determine the status of the natural gas industry, it faces two other issues: a lack of storage capacity and capacity to move it around to markets where it’s wanted.

Chris Faulkner, who heads up Dallas-based Breitling Oil and Gas, says the drought in the U.S. is causing precious water supplies to be earmarked for farmers, leaving oil and gas companies without water and unable to drill oil and shale gas wells.

“If drought conditions persist in areas where drilling occurs, several companies may have to cease operations,” Falkner said in a news release. He noted that the Marcellus Shale formation in Pennsylvania and Eagleford Shale in South Texas are in particular peril.

Canadian gas companies are similarly stopping production and shutting in supplies while they wait for prices to rise. That makes firms like Encana, Talisman, Progress Energy Resources and even a junior company like Painted Pony, good candidates for your watch list of stocks to keep an eye on.

by: Ray Turchansky

Edmonton Journal (Alberta)