Tag Archives: Natural Gas

Case Study on Natural Gas/Shale Industry; Buffett Reads

Shale gas is not a revolution. It’s just another play with a somewhat higher cost structure but larger resource base than conventional gas.

The marginal cost of shale gas production is $4/mmBtu despite popular but incorrect narratives that it is lower. The average spot price of  gas has been $3.77 since shale gas became the sustaining factor in U.S. supply (2009-2017). Medium-term prices should logically average about $4/mmBtu.

A crucial consideration going forward, however, will be the availability of capital. Credit markets have been willing to support unprofitable shale gas drilling since the 2008 Financial Collapse.  If that support continues, medium-term prices for gas may be lower, perhaps in the $3.25/mmBtu range. The average spot price for the last 7 months has been $3.13.

Gas supply models over the last 50 years have been consistently wrong. Over that period, experts all agreed that existing conditions of abundance or scarcity would define the foreseeable future. That led to billions of dollars of wasted investment on LNG import facilities.

Today, most experts assume that gas abundance and low price will define the next several decades because of shale gas. This had led to massive investment in LNG export facilities.

(CSInvesting: You should read Mr. Berman’s full report at the link below.  He uses history to debunk long-term prediction models and shows the common sense of looking at markets through the long lens of history.  The assumption of abundant natural gas could be wrong–many “experts” are not even thinking of vastly different outcomes to their models.)


Excellent interview:  https://www.youtube.com/watch?v=RY4kM1kWaGM


Excellent investment letters from Moran Creek

Are these sustainable competitive advantages ?http://www.collaborativefund.com/blog/sustainable-sources-of-competitive-advantage/

A great read on investing:http://www.collaborativefund.com/blog/what-i-believe-most/

Interesting Charts of Where We Are Now

The Markets

My takeaway is this: Now is the time to buy a home and take on low-cost long-term debt if you were ever considering buying a home to live in. Long-term bonds look like a little risk for no reward.

But, when in doubt, ignore the pundits and market forecasters and find undervalued bargains wherever they happen to be.


The Good News on Natural Gas


Southeastern Asset Management on CHK and Natural Gas

A good article on Natural Gas in the Economist: http://www.economist.com/node/21558432

Southeastern Asset Management (Mason Hawkins) 2nd Qtr. Longleaf Partners Fund Longleaf 06_30_12 Shareholder Letter

In the letter, the portfolio team speaks of their controversial holding Chesapeake Energy (“CHK”). Clients obviously are anxiously calling them about the falling price and controversial news.  There is one important lesson for all who invest in cyclical commodity based companies.

Lessons learned:

Longleaf 2nd Qtr. Letter: “Our conviction about CHK does not mean we are complacent about our path of ownership. We have learned two important lessons as our investment has unfolded.

First, we recognize that in commodity businesses, being a low cost provider is not enough of an advantage for an overweight position since the commodity price is subject to going below the cost of production for an unpredictable period of time.

Second, we learned a lesson that reinforces the importance of being a long-term investor who tries to work productively with management when change is warranted. We had much more influence in the tremendous governance transformation than we would have otherwise had if we had initiated our investment with guns blazing. The board and management listened to, trusted, and addressed our views knowing that our only agenda was to benefit long-term shareholders.”

John Chew: Ideally, you want to buy commodity companies when the price of the commodity is UNDER the marginal cost of production. Certainly when natural gas was trading near $2.00, almost no producer could generate a return above their cost of capital. Why were companies producing? The natural gas market is unusual in that there is limited storage (for now) so all gas produced must be sold immediately into the market and Hold-by-Production (“HBP”)means companies will hold leases by having to drill.

Exxon-Mobil on Natural Gas Market: http://www.forbes.com/sites/cfainstitute/2012/01/30/exxon-and-the-natural-gas-revolution/

Exxon CEO says low U.S. natgas prices not sustainable

ReutersBy Matt Daily | Reuters – Wed, Jun 27, 2012

              (Reuters) – U.S. natural gas prices are too low to allow the energy industry to cover the cost of finding and producing new supplies, the head of top producer Exxon Mobil said on Wednesday.

              Record production, thanks to new technologies that tap natural gas trapped in shale rock formations, pushed U.S. natural gas prices to 10-year lows below $2 per million British thermal units (mmBtu) in April, though prices have since rebounded.

              “The cost of supply is not $2.50. We are all losing our shirts today,” Rex Tillerson, chief executive officer of Exxon Mobil, said in a presentation at the Council on Foreign Relations.

              Gas prices have risen over 50 percent since April’s lows, and were up more than 5 percent on Wednesday to nearly $2.95 per mmBtu.

              Still, prices remain well below the $4-$5 level that makes drilling in pure natural gas fields profitable. Most producers have moved over to more lucrative oil and liquids-based plays to fetch higher prices, which has begun to put a slight dent in U.S. gas production.

              Tillerson also said the recent decline in oil prices appeared to be linked to rising crude oil inventories, economic worries in Europe and a slowdown in China’s growth, as well as a more stable political situation in the Middle East.


For those who want more balance sheet strength and conservative management–Devon Energy (DVN) might be of interest to explore. (Let’s check back in two years).

An On-Going Liquidation of Stocks; The Future of Hydrocarbons in the US



As depressing as our political and economic future seems, there is always hope: Manhattan Project on Hydrocarbons and the Future

Search Strategy: Go Where the Outlook is Bleakest

When I’m bearish and I sell a stock, each sale must be at a lower level than the previous sale. When I am buying, the reverse is true. I must buy on a rising scale. I don’t buy long stocks on a scale down, I buy on a scale up.
The average man doesn’t wish to be told that it is a bull or a bear market. What he desires is to be told specifically which particular stock to buy or sell. He wants to get something for nothing. He does not wish to work. He doesn’t even wish to have to think.

I never hesitate to tell a man that I am bullish or bearish. But I do not tell people to buy or sell any particular stock. In a bear market all stocks go down and in a bull market they go up. –Jesse Livermore

You get recessions, you have stock market declines. If you don’t understand that’s going to happen, then you’re not ready, you won’t do well in the markets.–Peter Lynch

I’ve found that when the market’s going down and you buy funds wisely, at some point in the future you will be happy. You won’t get there by reading ‘Now is the time to buy. –Peter Lynch


An Impending Recession?


Or hope for the future?


and http://scottgrannis.blogspot.com/2012/06/housing-update-significant-improvement.html

I prefer to focus bottom up. How about going where a depression is ALREADY occuring rather than fearing something bad WILL happen.

The Natural Gas MArket 

Natural Gas is currently trading under its true marginal cost of production due to a law known as “Hold by Production” where an exploration company must have a producing well operating in order to hold their leases in perpetuity.  Oil is trading at 20 times the BTU equivalent of natural gas. Also, storage facilities can’t hold as much nat. gas as is being produced, so production has to be sold at any price. The main point is that the cure for low prices is low prices or, in other words, the laws of supply and demand are inevitable given TIME.


The Arithmetic of Shale Gas: Consumer Benefits from Technology of Shale Gas Exceed $100 Billion

It’s  been well-documented now that falling prices for natural gas (see chart  above) and the resulting drop in utility rates have saved consumers  billions of dollars (see CD posts here and here).
A new study by researchers at Yale University, The Arithmetic of Shale Gas,” provides some additional evidence of the consumer benefits of shale gas using a cost-benefit approach, here’s an excerpt:

“The Henry Hub spot price in 2008 was $7.97 per mcf and in 2011 was $3.95 per mcf (see chart above) so that the difference in price over three successive  years was $4.02 per mcf. Gas production in 2008 was 25.6 tcf so that the surplus to consumers by the price reduction from shale gas equaled  $102.9 billion.

This very large amount of consumer gain—over $100 billion—from the new  technology induced price reduction in gas is the elephant in the room.  It comprised a substantial majority of total expenditures on this fuel  nationwide. In past years those expenditures were limited by the higher  costs of production of gas produced from vertical wells. These were in  part producer surplus but most were the costs of sustaining well  operations in the old technology. Even so it is startling to acknowledge that consumer benefits from the technology of shale gas drilling and  new gas production can be expected to exceed $100 billion per year, year in and year out as long as present production rates are maintained.”

The authors then account for the possible environmental costs to society  and compare that to the consumer-savings of $100 billion per year:
“How then do we extrapolate individual disaster scenarios across an entire  industry to determine the social cost of possible contamination from  fracking in order to deduct it from the consumer surplus of $100 billion for each year? We consider that the reported instances of contamination from fracking relate, at most, to an extremely limited minority over  hundreds of thousands of wells. Assuming the worst—that the accidents occur in one year; that the cleanup requires a new water well at $5,000; and that one hundred spills occur at $2.5  million per spill given then that the industry drills 10,000 new wells  per year. The cost of frackwater contamination is $250 million. Economic benefits, as estimated in as limited methodology as is reasonable,  exceed costs to the community by 400-to-1.”

And they also estimate the consumer benefits of switching from oil to natural gas:

Replacing 1.0 million bbls per day of crude oil with the 6 billion cubic feet  (bcf”) equivalent of natural gas, would generate approximately $25.6  billion ($70/bbl*1 million bbls*365 days) of consumer surplus for the US economy over one year.”

Note: There are also gains to shale gas producers from increased production, and while those are less than the gains to gas consumers, they are significant and are estimated be multi-billions of dollars per year.

Here’s a Forbes articlethat summarizes some of the key findings of the Yale study.

More here:http://www.creditbubblestocks.com/2012/05/natural-gasoil-btu-spread-in.html


The glut of natural gas has depressed natural gas and oil companies like Devon Energy (DVN) and Chesapeake (CHK). Of course, price may decline further, but lets check back on these two companies in early 2014.

See you in 2014!