In his weekly conference call, November 20, Investment Strategist, Donald Coxe, of Coxe Advisors LLC, discussed the outlook for Natural Gas, Shale Gas, and the controversial accounting of natural gas reserves for the sake of boosting reserve life index (RLI). Coxe's discussion about natural gas hinged on the much-asked question, "Will Natural Gas be the only major commodity not to participate in the commodity bull market?"
Here are the highlights of that discussion:
- Natural gas spot prices are too sensitive to changes in climate to be a reliable source of price trend information
- The March futures contract, backward looking for the last 4 years, for natural gas is a better indicator of trending because March is a median month, as it comes after the 3 coldest months of the year, reflecting the draw down in inventory.
- The chart shows the Hurricane Katrina relative spike, and then the sinking of prices for natural gas to new lows of $4.78/MCF.
- Natural Gas is the second most important commodity
- Historically Oil and Gas traded with good correlation to one another because of the 'substitution-ality' of the pair based on price.
- Commodity prices in the long term can be threatened by two factors - Substitution and/or technological advancement in extraction.
- Shale Gas horizontal drilling technology has smashed the price of natural gas relative to crude oil. It is an example of where technology is having a profound effect on price and supply.
- Problems are arising due to accounting rules that allow Integrated Oil and Gas firms to post proven gas reserves as a component of Reserve Life Index - 6 MCF of Natural Gas = 1 bbl. of crude oil.
- This is leading to vast "overstatements" of RLI at the integrated companies.
- Exxon, for example, went as far as to run ads saying they were the only oil and gas company to increase their production - virtually all from Shale Gas - but they counted that against crude oil.
- This is a widespread problem.
Coxe argues that unless accounting rules are changed, the more shale gas they find the more difficult it will be for investors. The mantra for investing in "reserves in the ground in politically secure areas of the world," will require that investors do more digging through SEC Filings to uncover more information about reserves.
- On the upside for energy, a lack of sunspot activity means it's likely to be a cold winter.
- Russia's power and dominance over Europe in the oil and gas sector is being beneficially challenged by Exxon's developments of discovered natural gas deposits in Germany.
- Europeans were panicked when Russia demonstrated that they could shut off gas to the Ukraine, forcing them to seek non-Putin arrangements for the long term.
Technological breakthrough has made it possible to extract natural gas profitably at $4.50 MCF and that means there is a price cap at that level.
Coxe recommends favouring "oily" companies, and be more cautious on evaluations of integrated oils, and notes that true oil reserves at some may just be too scanty.
