Have Natural Gas Prices Bottomed?
Last Friday we finally got confirmation of where all the natural gas supply has been coming from as Cabot (COG) reported its earnings. Just like Chesapeake (CHK), they reduced natural gas output, but on a much grander scale. CHK has yet to report and will do so on May 6th providing even more color on the subject.
Last month they announced a 2% reduction in NGAS volumes to 1-3% for 2015 vs. 3-5%. But the ramp up of supply from Marcellus, and to a lesser extent Utica, and a corresponding flat to up rig count in natural gas rigs in those areas appears to be the reason why NGAS has crashed some 30% despite a relatively cold winter in the mid-west and East especially. The magnitude of the supply increase is simply stunning, begging the question: what was Cabot’s management thinking by increasing NGAS production in Marcellus by some 40% to 162 BCF in 1Q15 and up 12.5% sequentially from 4Q14? And, to boot, 4Q14 was up over 13% sequentially from 3Q14!
Source: Company Data
The Marcellus region began ramping up in 2010 which has resulted in a surge in production which has probably peaked 1Q15 in terms of rate of growth. It has by far contributed to the largest increases in output and has signal handily resulted in the crash in prices.
With spot prices hovering around $2.45/MMBTU and within 10% of the most bearish estimate targets this quarter, it seems the worst of the oversupply is behind the market especially with EPA rules forcing coal to NGAS switching in volume this summer. Coal still represents the majority of fuel used to generate electricity despite this trend.
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