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Man, natural gas is a mess and North American drillers are getting hammered



April 08, 2009 – Comments (2) | RELATED TICKERS: CHK , NBR

The imminant recovery in the natural gas market that everyone was buzzing about several weeks ago has yet to materialize.  One only needs to take a quick look at the above chart to see what an absolute mess nat gas is right now.

Not only are natural gas prices low, but no relief is on the horizon in the near future because storage levels are well above their five year average:

Not surprisingly, this weakness in natural gas prices is hammering North American drillers.  Baker Hughes just published March 2009 rig count numbers (link)and they are Ugly with acapital U.

The U.S. rig count for March 2009 dropped to 1,105 active rigs. This is down 215 from February 2009 and down 692 from March 2008. The Canadian rig count number for March was even worse, 412 active rigs, down 196 from February '09 and down 212 from March '08.

These are some seriously bad numbers. Hopefully this dramatic drop in drilling activity will eventually serve to stabilize natural gas and oil prices, but I see absolutely no evidence of that happening yet. 

In the meantime, this process will be painful for drillers.  Investors who want to buy low should take a look at many of the natural gas producers out there like ConocoPhillips (COP), XTO, Devon Energy (DVN), or a number of the CANROYs that have gotten absolutely hammered. 

Bottom feeders can also look at drillers like Precision Drilling Trust (PDS) or Nabors Industries (NBR).  Pay close attention to the debt level of any company that you purchase the common stock for though.  An extended period of low natural gas prices could spell big problems for companies with high debt loads.

I personally have chosen to play it a little safer with my nat gas investments.  I have added Chesapeake's Convertible Preferred 6.25% stock (CHK-E) to my real world portfolio.  The conversion option for this issue is likely worthless, but at the time that I purchased it, it was yielding 10%.  It has risen nearly 20% since then, but it still sports an attractive yield of 9.4%.

I also added some Nabors 6.15% Corporate Bonds (Due 02/15/18) with a nice double digit yield to maturity to my portfolio.


2 Comments – Post Your Own

#1) On April 08, 2009 at 6:51 AM, TMFDeej (97.73) wrote:

Interestingly, Bloomberg has an article on this exact subject this morning that mentions a number of the companies that I just talked about.

The piece talks about how the lack of available credit is preventing producers from using out any more than their immediate cash flow to drill.  

According to an analyst from Jeffries, “They’re not jumping on lower service costs simply because they can’t. They’re literally stepping away from anything they’re not contractually obligated to."

The article theorizes that the credit crunch will make the rise in the price of oil and natural gas more dramatic when demand eventually recovers because in the past drillers and producers have started to ramp up their operations when prices fell by X%, but they are unable to ramp up their operations in anticipation of a rebound in prices this time around.

Oil and Gas May Rise on ‘Slingshot’ Effect as Credit Idles Rigs


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#2) On April 08, 2009 at 11:53 AM, Kenaida22 (62.61) wrote:

I hear Natural Gas is going lower in the short term.

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