Keith Schaefer: My #1 Question....When Should I Invest in Natural Gas?

A Contrarian View of the Gas Market....and 4 Questions To Ask Yourself

It is, by a longshot, the most frequently asked question among OGIB readers over the last two years....“When should I buy natural gas? And should I buy ETFs? Future contracts? Natural gas producer stocks? I’ll tell you my thoughts, and I’ll also give investors four questions to ask the management teams of their natural gas producers that could help you protect your investment. The culprit of these low prices is the highly profitable shale gas plays that have grown very quickly all over North America. Shale gas wells often pay out very quickly, on an operating cost basis. The team writing the energy daily letter at National Bank in Canada had an interesting take on gas yesterday that mirrored my thoughts.

“Finally, the conventional wisdom that appears to be growing in the gas market is that the market is poised for a significant rally because of the overwhelmingly bearish mood and the fact that there are no buyers anymore out there for gas. “We would agree if in fact there were no buyers out there for gas. “But there are buyers, ETF investors (in a big way at these low prices), Reliance Industries, Mitsui, KoGas, Statoil, China National Petroleum Corporation, BG Group and Shell to name a few. Once these capital injections cease, the time will be right to become very bullish on gas. The key is to be the first one to recognize this phenomenon…or at least not the last.” The companies they named are large foreign producers who have paid big money to farm into shale plays just to learn the technology.

In 2009, the investment bankers were able to raise money for even the junior gas companies that were unhedged. Raising money for senior or intermediate producers was even easier. And just as the buy side institutions that bought those financings became wary of a long time of low gas prices, the industry was able to get capital from these international players.

Until all these sources of capital dry up and natural gas producers are feeling more forced to curtail production, gas prices could remain this low or lower. The good news is that with these low prices, producers can’t hedge good prices for 2011, like they could last year for their 2010 production.

So what does this mean for retail investors, how can we use that information to protect or increase the value of our portfolio? The answer is, know your investments, and here are four questions to ask management. Investors in the junior gas weighted stocks, in both Canada and the US, should be very cautious now.

First investors should check if their company’s are near their debt ceiling, and there are lots who are, because these companies can’t raise money (equity; or issue shares) now. They only have their debt line and cash flow. And net cash flow right now is very low for these producers.

Second, investors should ask management if they would have to take any reserve writedowns if the independent evaluators came in to do their calculations at today’s prices. A company’s reserves are their assets from which they can secure lending against. If those reserves were economic last December 31, they might not be this year at these lower prices, we have yet to see any meaningful rally in gas prices this fall, compared to last year. And reserves are This which would mean they may have to suddenly sell assets or do very dilutive financings at very low share price just to stay alive.

Third, investors should also be checking if their natural gas weighted investments are reducing production, which is good for preserving cash but generally not for the stock price. The market pays for growth, not contraction.

Energy consultants Ziff Energy recently said that junior producers should not be spending any money, in order to preserve capital during this time when full cycle costs, where you amortize everything into your costs of production, are almost twice what the current gas price is in Canada, and 50% higher than current spot price in the US.

Fourth, ask management what their plan is to survive an even longer period of low natural gas prices if they are unhedged. It’s your company and it’s your money.


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A Breakthrough Invention in the Oil and Gas Market?

From Keith Schaefer at "Oil and Gas Investments Bulletin"....

An oil and gas entrepreneur in the US has devised an inexpensive way to capture oil and natural gas vapors around a well site, and sell them to make money. These vapors are often flared (burned), or vented into the atmosphere, and trust me, if people really knew how much oil and gas was flared around the world every day, even in first world countries, the media outcry would make the "water fracking" issue look like a kindergarten party. In fact satellite images show intense flaring occurring, principally in third world countries. Shell has just committed $2 billion to reduce flaring from its operations in Nigeria.


“Air pollution requirements related to oil and gas production from the states are becoming increasingly restrictive,” says co-inventor Dr. Paul Trost. And Trost's solution can be profitable. He adds that a study near Denver in the hydrocarbon rich Denver Basin containing almost 8000 oil and gas wells showed the “fugitive” hydrocarbons, gases emanating from production tanks can be captured and sold at a profit rather than burned in a flare. Just like water evaporates in a dish, oil and gas evaporates from the production tank at a well site, and escapes into the atmosphere or alternately is burned (flared).

The problem becomes bigger when a combination of gas and oil are produced with the gas being injected into a pipeline having pressure. The oil then is also pressurized and the pressurized gases (like gas in a pop can) then “flash” or boil off like a shaken beer can. In certain areas these gases are captured and directed to a flare for burning rather than being allowed to vent to the atmosphere.

Trost’s invention, called the V3RU (Variable Volume Vapor Recovery Unit), is different than other vapor recovery systems in that it uses a flexible accumulator (bag) to capture the vapors. “It swells up like it is taking a deep breath,” says Trost. “The bag thus captures both the flash gas and also any contained liquids. We exhale it slowly into compressor for injection and sale to a pipeline. It’s a variable volume bag and it’s safety rated. The alternative energy industry already uses it around breweries located in or adjacent to cities.” Without a bag, Trost says oxygen can get at the vapour and then it won’t meet pipeline specifications. The gas is then useless and must be flared. Using a bag allows some back pressure to be used, so it won’t let air in, and the gas retains its purity and suitability for pipeline sale.

Trost says the payout for the V3RU increases as the oil content of the natural gas increases, and also as the oil gets lighter (has a higher API rating) and contains more condensate. Typically the V3RU will range in cost from $8,000-$30,000. He gives a real life example of a gas/condensate well in Colorado that was producing about 30 BOPD and 400 mcfd, but high pipeline pressures were causing a large amount of “flash” gas, containing both recoverable oil and gas, was being lost. Application of the V3RU will allow the operator was able to capture an additional 8-10 boe/d, resulting in roughly a 2 year payout.

The product has been used almost exclusively in the Denver Basin, Trost says, but it is now starting to be used in other areas. Trost is a board member of Nextraction Energy (NEX-TSXv), which will be using the V3RU vapor recovery system to meet air quality regulations at Nextraction’s newly discovered gas-condensate well located at the Pinedale Anticline play in Wyoming.

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Crude Oil Bulls Struggle to Maintain Their Advantage, Here's Wednesdays Closing Numbers

The S&P 500 index closed higher on Wednesday as it extended the rally off August's low. The high range close sets the stage for a steady to higher opening on Thursday. Stochastics and the RSI are overbought but remain neutral to bullish signaling that additional gains are possible near term. If December extends the aforementioned rally, June's high crossing at 1122.90 is the next upside target. Closes below the 20 day moving average crossing at 1077.12 would confirm that a short term top has been posted. First resistance is Tuesday's high crossing at 1122.30. Second resistance is June's high crossing at 1122.90. First support is the 10 day moving average crossing at 1099.20. Second support is the 20 day moving average crossing at 1077.12.

Crude oil closed lower due to profit taking on Wednesday as it consolidates some of the rally off August's low. The mid-range close sets the stage for a steady opening on Thursday. Stochastics and the RSI are overbought but remain neutral to bullish signaling that sideways to higher prices are possible near term. If October extends the rally off August's low, the 62% retracement level of the August decline crossing at 78.58 is the next upside target. Closes below the 20 day moving average crossing at 74.47 would temper the near term friendly outlook. First resistance is Monday's high crossing at 78.04. Second resistance is the 62% retracement level of the August decline crossing at 78.58. First support the 20 day moving average crossing at 74.47. Second support is August's low crossing at 70.76.

Natural gas closed higher on Wednesday as it extended Tuesday's breakout above the 20 day moving average. The mid-range lose sets the stage for a steady to higher opening on Thursday. Stochastics and the RSI are bullish signaling that sideways to higher prices are possible near term. If October extends this week's rally, the 25% retracement level of the June-August decline crossing at 4.102 is the next upside target. Closes below the 10 day moving average crossing at 3.866 would temper the near term friendly outlook. First resistance is today's high crossing at 4.060. Second resistance is the 25% retracement level of the June-August decline crossing at 4.102. First support is the 10 day moving average crossing at 3.866. Second support is August's low crossing at 3.697.

The U.S. Dollar closed higher due to short covering on Wednesday as it consolidated some of this week's decline. The high range close sets the stage for a steady to higher opening on Thursday. Stochastics and the RSI remain bearish signaling that sideways to lower prices are possible near term. If December extends the decline off August's high, August's low crossing at 80.75 is the next downside target. Closes above the 20 day moving average crossing at 82.94 would confirm that a short term low has been posted. First resistance is the 10 day moving average crossing at 82.51. Second resistance is the 20 day moving average crossing at 82.94. First support is Tuesday's low crossing at 81.24. Second support is August's low crossing at 80.75.

Gold closed lower due to profit taking on Wednesday as it consolidated some of Tuesday's rally. Stochastics and the RSI are overbought, diverging but are turning bullish again signaling that sideways to higher prices is possible near term. If December extends the rally off July's low, upside targets will now be hard to project following yesterday's rally to a new contract high. Closes below the reaction low crossing at 1237.90 would confirm that a double top with June's high has been posted. First resistance is Tuesday's high crossing at 1276.50. First support is the 20 day moving average crossing at 1245.90. Second support is the reaction low crossing at 1237.90.

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