ISI Energy: Lowering US Natural Gas Outlook, Stable Supply, Lower Demand
Jonathan D. Wolff, CFA
Back to Work at ISI. What’s Different?
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We Were Bullish Last Time: Our previous thoughts on rapidly falling supply proved optimistic. But our lowered
natural gas forecast feels non-consensus in the face of a recent 25% up move to $4.00 per MMBtu. The rise appears
to be driven by strong weather driven draws and related short-covering rather than fundamental supply and demand
factors.
We are taking the view that prices will fade to the mid-$3’s on tough spring/summer weather comps, persistently
high supply and near-term limits on additional coal to gas switching.
We have taken a fresh approach to our US natural gas market analysis, having spent ample time over the past 8
months learning much more about Midstream systems, coal-to-gas switching and basin modeling.
We have created a new supply forecasting model that captures 21 basins (93% of supply). The model indicates
only slight supply declines in ’13.
Our detailed work on the Midstream/Pipeline segment should be a better predictor of the timing of supply. The
model indicates significant supply additions even at a low rig count as existing/non-producing wells are tied into
new wet gas systems. The market appears to be under-estimating the impact of de-bottlenecking.
We have developed detailed demand forecasts with the help of Greg Gordon’s Power team. We expect gas
demand for power to fall ~ 2 Bcf/d in 2013
2
Key Variables: Lowering Gas Forecasts; Dull Markets in 2013
ISI Natural Gas Forecast
WTI Crude Oil
Brent Crude Oil
Previous
$/MMBtu
$3.25
$3.75
$4.25
$4.50
$3.94
ISI
$/MMBtu
$3.34
$3.50
$3.75
$4.00
$3.65
Futures
$/MMBtu
$3.34
$3.98
$4.05
$4.15
$3.88
ISI
$/Bbl
$93.86
$91.00
$101.00
$106.00
$97.97
Futures
$/Bbl
$93.40
$92.65
$93.08
$92.19
$92.83
ISI
$/Bbl
$112.08
$105.00
$115.00
$120.00
$113.02
Futures
$/Bbl
$112.83
$108.50
$106.21
$104.51
$108.01
2014
$4.25
$4.50
$4.25
$4.21
$111.00
$89.88
$120.00
$101.41
2015
$4.75
$5.00
$4.75
$4.32
$91.00
$87.47
$100.00
$97.73
2016
$4.75
$5.00
$4.75
$4.46
$91.00
$85.88
$100.00
$95.17
Q1 2013
Q2 2013
Q3 2013
Q4 2013
2013
Source: ISI estimates, Bloomberg
3
NYMEX Natural Gas
Current
$/MMBtu
$3.34
$3.50
$3.75
$4.00
$3.65
Summary
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Reducing NYMEX Natural Gas Outlook
o
2013: to $3.65 from $3.94,
o
2014: to $4.25 from $4.50,
o
2015+: to $4.75 from $5.00
2013 Looks Like a Slog: Gas prices expected to return to weakness as our supply/demand analysis shows 1.3
Bcf/d loose (read on).
2014 Outlook is Better: Continued organic gas demand growth (power) and falling supply (~1.0 to ~1.5
Bcf/d) as acreage holding slows in wet gas plays (Eagle Ford, Cana).
2015+ Outlook Reduced to $4.75 per MMBtu: The cost curve has clearly been pushed lower due to
‘Associated gas’ plays and improved Marcellus productivity.
4
Near-Term Outlook: Expect Prices to Retrace to mid-$3’s
CFTC Non-Commercial Net Natural Gas Future
Storage Withdrawals (Bcf )
Natural Gas ($/MMBtu)
5-year averge
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Mar-13
Feb-13
Feb-13
Jan-13
Jan-13
Jan-13
Dec-12
$1.00
Dec-12
Heating season to date
(180)
NYMEX natural gas feels near-term ‘over-bought’: We believe near-term natural gas is overbought after
staging a 25% rally to a recent peak above $4.00 vs. the $3.11 low-point for the year.
Speculators Covering Short Positions: The large non-commercial short-position in gas has narrowed recently,
indicating covering may be a part of the big up-move.
Gas Likely to Retrace to Mid-$3’s in 2Q/3Q: We expect NYMEX gas prices to re-trace to the mid-$3’s in the
coming months as bearish fundamental factors become more clear.
Supply is at Record Highs, Demand Comps Tough: Recent US dry gas production has reached record highs.
Our basin analysis shows only a small decline in 2013. Demand faces tough weather comps.
Lower YoY Storage, Mexican Exports are Lone Bull Factors: From a bullish standpoint, end-March storage
will now finish at lower levels. Also, Mexican exports look set to rise on new capacity from south and west Texas.
Source: EIA, ISI estimates, Bloomberg
5
YTD
$1.50
Nov-12
4-weeks
(150)
Oct-12
0
$2.00
Nov-12
200
(120)
Oct-12
400
$2.50
Sep-12
600
(90)
Sep-12
800
$3.00
Aug-12
1,000
(60)
Jul-12
1,200
$3.50
Aug-12
1,400
(30)
Jul-12
1,600
$4.00
Jul-12
Contracts (thousands)
1,800
0
Jun-12
2011/12
Jun-12
2012/13
2,000
US Natural Gas Supply/Demand Outlook is 1.3 Bcf/d Loose
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Supply/ Demand Balances Look Loose
o
Loose Gas Market Outlook: Our supply/demand analysis indicates a ~1.3 Bcf/d ‘loose’ market in 2013
o
Only Minor Supply Declines: We have conducted a deep analysis of 21 US supply basins which points
to flattish supply in ‘13 (from current peak).
o
Gas Demand for Power Expected to Fall 2 Bcf/d: Tough demand comps in 2013 on weather and coalto-gas switching
o
Mexican Exports are a Bright Spot: demand is strong south of the border and new infrastructure has
been added
USRig
Onshore
Gas Production (LHS)
Count (RHS)
0
Source: ISI estimates, Bentek
6
Sep-12
40
May-12
225
Jan-12
45
Sep-11
450
May-11
50
Jan-11
675
Sep-10
55
Jan-10
900
May-10
60
Sep-09
1125
May-09
65
Jan-09
1350
Sep-08
70
May-08
1575
Jan-08
75
Sep-07
1800
May-07
80
Jan-07
Bcf/d
Rig
Count
(RHS)
Gas
Production
2013E-2012
Yr/Yr Change
Supply/Demand Balance
(Bcf/d)
Power Demand
1.8
Industrial Demand
(0.3)
Res/Comm Demand
0.0
Supply
0.0
Canadian Imports
(0.1)
Ethane Rejection
0.3
Mexican Exports
(0.4)
Total Balance
1.3
Near-Term Gas ‘Slog’ To Resume
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Spring/Summer Storage Comps are Tough: During the 2011 refill season cooling degree days were ~22%
above the 5-year average reducing storage injections to 28% below normal. Assuming summer weather reverts
to “normal” we could see significantly higher injections this year.
2012 Natural Gas Storage Injections vs. Normal
2012 Storage Injections
"Normal" Injections
100
90
80
70
Bcf
60
50
40
30
20
10
0
14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39
Week
Source: Bentek, EIA, company filings
7
Near-Term Gas ‘Slog’ To Resume
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Midstream De-Bottlenecks Creating More Gas Supply: Through 2014 we expect nearly 14 Bcf of
processing capacity to start up. A significant portion will be in the Appalachian basin where low F&D costs and
growing liquids production should drive superior economics for producers. Notably, some of this incremental
processing capacity will ramp up over time as producers complete wells and tie them in to the system.
5.0
25
4.0
20
3.0
15
2.0
10
1.0
5
0.0
0
Appalachian
Source: Bentek, EIA, company filings
8
Texas Gulf
Coast
Anadarko
Permian
Bakken
Number of Plants
Bcf /d
Expected Processing Capacity Through 2014
We Expect Gas Demand From The Power Sector to Fall ~2 Bcf/d YoY
Tough comps on fuel switching and weather should force demand down lower in 2013. Gas Demand from the Power
Sector was up 4 Bcf / day (20%) in 2012 vs. 2011, and 4.6 Bcf / day (23%) vs. 2010.
FY Gas Demand (bcf / d)
• 2013 YTD Demand is down 2.0 Bcf / day (~9%) vs. Q1 2012
FY 2010
20.4
FY 2011
21.0
+3.7 bcf / day
FY 2012
25.0
12
vs.
11
+4.8 bcf / day
YTD 2013
19.9
35.0
12 vs. 11
Gas Demand (bcf / d)
30.0
25.0
20.0
Down 2 bcf /
day 13 vs. 12
(red arrow)
21.9
19.9
+6.4 bcf / day
12 vs. 11
26.5
31.6
27.6 27.8
+1.0 bcf / day
12 vs. 11
19.6 20.2
17.7
16.5 17.1
18.9
19.9
15.0
10.0
5.0
0.0
Q1
Q2
2010
Source: ISI estimates, Bloomberg, Bentek
2011
Q3
2012
Q4
YTD
Outlook for 2013 Demand from Power Generation
Assuming the current ‘13 forward price of ~$4/ mmbtu and normal weather, we estimate gas demand from the
power sector to be ~22.5 - 23.5 bcf / d in 2013
Gas Demand from Power Generation (Bcf / d)
30.0
25.0
0.7
0.2
If ’13 gas prices were to fall below $3.75 / mmbtu
NAPP/ IL Basin displacement would increase. Gas prices
<$2.60 / mmbtu would lead a return of PRB displacement.
CAPP coal does not become economic until gas prices rise to
above $4.50 / mmbtu
0.5
1.7
20.0
0.4
1.3
15.0
25.0
23.0
10.0
5.0
Est. 2013 Demand
Renewables
New Gas Generation
Coal Retirements
Power Demand
NAPP / IL Dispatch
Source: ISI estimates
PRB Dispatch
2012 Demand
0.0
Natural Gas vs. Coal
Fuel Cost per MMBtu (Adjusted)
$14
Natural Gas
PRB
CAPP
$12
$10
$8
$6
$4
$2
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Jan-13
Jul-12
Jan-12
Jul-11
Jan-11
Jul-10
Jan-10
Jul-09
Jan-09
Jul-08
Jan-08
Jul-07
Jan-07
Jul-06
Jan-06
Jul-05
Jan-05
Jul-04
Jan-04
Jul-03
Natural gas should retain East Coast, price-induced market share gains at prices below $4.50$5.00/MMBtu
Source: Bloomberg, ISI estimates
11
Jan-03
Jul-02
Jan-02
Jul-01
$0
Natural Gas Supply Has Reached New Highs
Wyoming
Oklahoma
New Mexico
GOM
Louisiana
Other
Texas
80
70
60
Bcf/d
50
40
30
20
10
Jan-05
Apr-05
Jul-05
Oct-05
Jan-06
Apr-06
Jul-06
Oct-06
Jan-07
Apr-07
Jul-07
Oct-07
Jan-08
Apr-08
Jul-08
Oct-08
Jan-09
Apr-09
Jul-09
Oct-09
Jan-10
Apr-10
Jul-10
Oct-10
Jan-11
Apr-11
Jul-11
Oct-11
Jan-12
Apr-12
Jul-12
Oct-12
0
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Source: EIA
12
Supply Continues to Grow Despite Lower Rig Count: While the persistent strength has been
surprising, the riddle can be explained by a large drilled but uncompleted (DUC) inventory
established in the 2008-2011 gas drilling frenzy, increased drilling in 'liquids-rich' plays that
yield associated gas and infrastructure bottlenecks/efficiency gains (Marcellus).
U.S. Natural Gas Rig Count vs. Completions
Natural Gas Completions
Natural Gas Rig Count
35,000
1,600
30,000
1,371
25,000
1,143
20,000
914
15,000
686
10,000
457
5,000
229
0
0
2001
Source: Baker Hughes, ISI estimates
13
2003
2005
2007
2009
2011
ISI Estimated 2013 Gas Supply Model Shows Only Minor Decline
Basin
Bakken
Anadarko basin
Permian
Northern M idcon
M ature M idcon
Haynesville (LA)
East Texas (CV, HV)
Fayetteville
Barnett
TXGC (Incl. Eagle Ford)
M arcellus- PA
West Virginia
Utica- OH
Northeast- M ature
Offshore
Green River
Piceance
DJ
Uinta
PRB
M ature Rockies
S ubTotal (Active Basins)
Other Production
Total Dry
Imports (Exports)
M exico
Canada
LNG
S upply Change
Source: ISI estimates, Benetk, Smith Bits
14
Recent
2013E Exit
Dry Gas
Rate Change
(MMCf/d)
(MMcf/d)
517
86
6,000
600
3,200
320
875
5
1,800
(126)
5,800
(490)
3,900
(735)
2,900
285
5,300
(420)
6,400
540
6,900
400
1,600
250
200
50
665
(40)
4,600
(100)
3,400
(140)
1,800
(175)
1,000
240
1,100
(131)
850
(68)
550
(44)
59,357
307
4,643
(325)
64,000
(18)
(400)
(100)
0
(518)
Rig Count
Total
204
223
439
90
0
25
43
16
62
150
74
21
33
4
47
18
12
42
36
22
7
1,568
2013E
Peak
Gas/ Hybrid
232
200
251
150
529
160
N/A
15
N/A
6
149
22
232
18
68
13
241
39
169
130
121
70
24
23
N/A
37
28
4
154
3
88
18
91
11
58
45
36
9
55
22
N/A
N/A
2,526
995
Natural Gas Producer Survey Looks Similar to Our Bottoms Up Analysis
Change in 2013E Gas Production (MMcf/d)
Company
XOM
CHK
APC
DVN
SWN
BP
ECA
COP
CVX
RDS
BHP
WPX
EOG
APA
EQT
COG
QEP
RRC
UPL
NBL
PXD
NFX
KWK
ROSE
SFY
CRZO
PDCE
PVA
Total
Source: Company filings
15
Q412
3,747
2,877
2,521
2,029
1,628
1,593
1,540
1,508
1,273
1,209
1,200
1,100
901
891
829
813
666
655
635
447
395
358
275
101
94
93
90
41
29,508
Q413E
3,675
2,720
2,422
1,936
1,809
1,500
1,480
1,430
1,200
1,200
1,228
994
816
812
987
1,141
595
685
613
465
379
317
283
114
94
91
96
34
29,115
% change
-1.9%
-5.5%
-3.9%
-4.6%
11.1%
-5.8%
-3.9%
-5.2%
-5.7%
-0.7%
2.3%
-9.7%
-9.4%
-8.8%
19.1%
40.3%
-10.7%
4.5%
-3.5%
4.1%
-3.9%
-11.5%
2.9%
13.3%
-0.5%
-3.0%
6.7%
-16.5%
-1.3%
2014 Bottoms Up Basin Analysis Shows 1 Bcf/d Decline
Basin
Bakken
Anadarko basin
Permian
Northern M idcon
M ature M idcon
Haynesville (LA)
East Texas (CV, HV)
Fayetteville
Barnett
TXGC (Incl. Eagle Ford)
M arcellus- PA
West Virginia
Utica- OH
Northeast- M ature
Offshore
Green River
Piceance
DJ
Uinta
PRB
M ature Rockies
S ubTotal (Active Basins)
Other Production
Total Dry
Imports (Exports)
M exico
Canada
LNG
S upply Change
Source: ISI estimates, Benetk, Smith Bits
16
Recent
2014E Exit
Dry Gas
Rate Change
(MMcf/d)
(MMcf/d)
603
100
6,600
330
3,520
320
880
64
1,674
(117)
5,310
(359)
3,165
(415)
3,185
(315)
4,880
(294)
6,940
152
7,300
400
1,850
200
250
150
625
(38)
4,500
(75)
3,260
(112)
1,625
(131)
1,240
288
969
(98)
782
(63)
506
(40)
59,664
(52)
4,336
(304)
64,000
(356)
(300)
(300)
0
(956)
Rig Count
Total
204
223
439
90
25
43
16
62
150
74
21
33
4
47
18
12
42
36
22
7
1,449
2014E
Peak
Gas/ Hybrid
232
185
251
120
529
150
N/A
20
N/A
4
149
20
232
18
68
10
241
39
169
110
121
60
24
23
N/A
52
28
4
154
3
88
18
91
11
58
55
36
9
55
20
N/A
N/A
Source: Benetk
17
Feb-13
Jan-13
S. Pennsylvania
Dec-12
Nov-12
Oct-12
Sep-12
Aug-12
DJ Basin
Jul-12
Jun-12
May-12
Apr-12
Permian
Mar-12
Feb-12
Jan-12
Dec-11
Anadarko
Nov-11
Oct-11
Sep-11
Aug-11
Eagleford
Jul-11
Jun-11
May-11
Apr-11
16
Mar-11
Feb-11
Jan-11
Bcf/d
Associated Gas Production by Play
Utica
14
12
10
8
6
4
2
-
NGL Pricing
"Rich" Natural Gas (with Btu uplif t)
Dry Gas
$10.00
$9.00
$8.00
$7.00
$/MMBtu
$6.00
$5.00
$4.00
$3.00
$2.00
$1.00
$0.00
Jan-09 May-09
Source: Bloomberg, ISI estimates
18
Sep-09
Jan-10 May-10
Sep-10
Jan-11 May-11
Sep-11
Jan-12 May-12
Sep-12
Jan-13
NE Marcellus Dry Natural Gas Production
Rig Count (RHS)
Marcellus Completions
Gas Production (LHS)
6,000
300
5,000
250
4,000
200
3,000
150
2,000
100
1,000
50
2,500
-
1,500
1,000
500
Jan-13
Nov-12
Sep-12
Jul-12
May-12
Mar-12
Jan-12
Nov-11
Sep-11
Jul-11
May-11
Mar-11
Jan-11
Source: Bentek, Smith Rig Count, State Filings, ISI estimates
19
Rigs
MMcf/d
2,000
0
2008
2009
2010
2011
2012
Haynesville Natural Gas Production
Rig Count (RHS)
Haynesville Completions
Gas Production (LHS)
12,000
180
11,000
150
10,000
120
1800
9,000
90
8,000
60
7,000
30
6,000
-
1400
1200
Rigs
MMcf/d
1600
1000
800
600
400
200
Jan-13
Nov-12
20
Sep-12
Jul-12
May-12
Mar-12
Jan-12
Nov-11
Sep-11
Jul-11
May-11
Mar-11
Jan-11
Source: Bentek, Smith Rig Count, State Filings, ISI estimates
0
2007
2008
2009
2010
2011
2012
Bakken Natural Gas Production
Bakken Completions
Gas production (LHS)
600
240
500
200
400
160
300
120
200
80
100
40
2,100
1,800
1,500
Rigs
MMcf/d
Rig Count (RHS)
1,200
900
600
300
-
Jan-13
Nov-12
21
Sep-12
Jul-12
May-12
Mar-12
Jan-12
Nov-11
Sep-11
Jul-11
May-11
Mar-11
Jan-11
Source: Bentek, Smith Rig Count, State Filings, ISI estimates
0
2007
2008
2009
2010
2011
2012
Mexican Exports Growing
Mexican Exports (MMcf /d)
1,800
1,600
1,400
1,200
1,000
800
600
400
200
2005
Source: Bentek
22
2006
2007
2008
2009
2010
2011
2012
2013
YTD
Canadian Imports Declining
Canadian Imports to U.S.
Canadian Imports (MMcf/d)
Total Canadian Gas Production
20,000
8,000
18,000
7,000
16,000
6,000
12,000
10,000
5,000
8,000
6,000
4,000
4,000
2,000
23
Jan-13
Nov-12
Sep-12
Jul-12
May-12
Mar-12
Jan-12
Nov-11
Sep-11
Jul-11
May-11
2010
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
Source: Bentek, EIA
Mar-11
3,000
-
Jan-11
MMcf/d
14,000
Potential LNG Exports
Capacity
Project
Location
Status
Cheniere/Sabine Pass LNG
Sabine Pass, TX
Under construction
(Bcf/d)
2.60
Freeport LNG
Freeport, TX
Proposed to FERC
1.80
Cheniere - Corpus Christi
Corpus Christi, TX
Proposed to FERC
2.10
Jordan Cove Energy Project
Coos Bay, OR
Proposed to FERC
0.90
Southern Union - Trunkline LNG
Lake Charles, LA
Proposed to FERC
2.40
Sempra - Cameron LNG
Hackberry, LA
Proposed to FERC
1.70
Dominioin - Cove Point
Cove Point, MD
Proposed to FERC
0.75
Oregon LNG
Astoria, LNG
Proposed to FERC
1.30
Excelerate Liquefaction
Lavaca Bay, TX
Proposed to FERC
1.38
Apache Canada Ltd.
Kitimat, BC
Proposed to FERC
0.70
BC LNG Export Cooperative
Douglas Island, BC
Proposed to FERC
0.25
Gulf Coast LNG Export
Brownsville, TX
Identified project
2.80
Gulf LNG Liquefation
Pascagoula, MS
Identified project
1.50
Southern LNG Company
Elba Island, GA
Identified project
0.50
ExxonMobil - Golden Pass
Sabine Pass, TX
Identified project
2.60
CE FLNG
Plaquemines Parish, LA
Identified project
1.07
Waller LNG Services
Cameron Parish, LA
Identified project
0.16
Pangea LNG
Ingleside, TX
Identified project
1.09
Shell Canada
Prince Rupert Island, BC
Identified project
1.00
Pieridale Energy Canada
Goldboro, NS
Identified project
0.67
Royal Dutch Shell
Sarnia, Ontario
Identified project
0.03
Royal Dutch Shell
Geismar, LA
Identified project
0.03
27.34
Source: DOE, Company presentations
24
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the subjects or issuers referenced in this Report. No part of the compensation of any person involved in the preparation of this Report was, is, or will
be directly or indirectly related to the specific recommendations or views expressed by research analysts in this Report.
DISCLOSURE: Neither ISI nor its affiliates beneficially own 1% or more of any class of common equity securities of the subject companies referenced in
the Report. No person(s) responsible for preparing this Report or a member of his/her household serve as an officer, director or advisory board
member of any of the subject companies. No person(s) preparing this report or a member of his/her household have a financial interest in the subject
companies of this Report. At various times, the employees and owners of ISI, other than those preparing this Report, may transact in the securities
discussed in this Report. Neither ISI nor its affiliates have any investment banking or market making operations. No person(s) preparing this research
Report has received non-investment banking compensation form the subject company in the past 12 months. ISI does and seeks to do business with
companies covered in this research Report may have or has received non-investment banking compensation in the past 12 months.
DISCLAIMER: This material is based upon information that we consider to be reliable, but neither ISI nor its affiliates guarantee its completeness or
accuracy. Assumptions, opinions and recommendations contained herein are subject to change without notice, and ISI is not obligated to update the
information contained herein. Past performance is not necessarily indicative of future performance. This material is not intended as an offer or
solicitation for the purchase or sale of any security.
ISI RATING SYSTEM: Based on stock’s 12-month risk adjusted total return.
STRONG BUY Return > 20%
BUY
Return 10% to 20%
NEUTRAL
Return 0% to 10%
CAUTIOUS
Return -10% to 0%
SELL
Return < -10%
ISI has assigned a rating of STRONG BUY/BUY to 47% of the securities rated as of 12/31/12.*
ISI has assigned a rating of NEUTRAL to 50% of the securities rated as of 12/31/12.*
ISI has assigned a rating of CAUTIOUS/SELL to 4% of the securities rated as of 12/31/12.*
(Due to rounding, the above number may add up to more/less than 100%).
*Please note as of January 2013 ISI Group LLC has changed our ratings system to the categories described above.
For the distribution of ratings for the quarter ending 12/31/12, what was previously rated as a BUY is now reflected in the Strong Buy/Buy category,
what was previously rated as a HOLD is now reflected in the Neutral category, and what was previously rated as a SELL is now reflected in the
Cautious/Sell category.
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