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Thursday, October 7, 2010

Weekly DOE Natural Gas Storage Analysis

Injection exceeds expectations – The EIA reported a natural gas injection of 85 bcf compared to market expectations (as per Bloomberg) of 79 bcf and the five-year average of 67 bcf. For the comparable week last year, the EIA reported an injection of 69 bcf. Total storage now sits at 3,499 bcf, or 4.1% below last year’s level of 3,649 bcf, but 6.7% above the five-year average of 3,279 bcf.

Cooling demand continues – Over the past week, the U.S. reported cooling degree days of 30, ~7% above the five-year average of 28 and ~43% above last year’s level of 21. Warmer weather is expected to continue across much of the U.S. mid-west and west coast as highlighted below which should help support near-term natural gas demand. Power generation for the week was up 4.0% yr/yr (20th straight week of yr/yr increases) and is now up 4.5% year-to-date.

Gas Producers Starting to Hint at Slowing. We are beginning to see signs of slowing from select natural gas-focused producers. Recently, GMX Resources (GMXR) cut its 2011 capex guidance by 13% as it plans to sub-lease three of its four contracted rigs. Sandridge Energy (SD) noted it had dropped from 8 rigs to 1 in the gassy Pinon Field of West Texas. Devon Energy (DVN) has signaled it will deemphasize gas production as it focuses on West Texas and Canada oil properties. CHK has also stated that it will reduce its 'HBP' rigs (those running to hold leases) from the current ~45 range to 30 by year-end 2011. HK signaled it can reduce its Haynesville rig count by 35-15% versus current levels (14 rigs) in the event of $4-5.00 per MMBtu gas and is also open to letting leases expire in order to preserve capital. EOG has also stated it will let certain non-core leases expire in the Haynesville Shale. Gas producers should advertise more discipline on 3Q earnings calls to preserve capital, enhance profitability and reverse recent share price underpeformance.

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