Thursday, January 10, 2013

Natural Gas outlook

Over the weekend I thought more about my Natural Gas trade.  I felt that there would be another cold spurt or two that would push Natural Gas up.  At the time of my trade (here), my plan was to hold the trade to expiration.

With Natural Gas in the outer months trading near 3.40 I said to myself, do I think Natural Gas trades with a 4 handle or a 2 handle first?  The conclusion I came to is that Natural Gas will trade at a 2 handle and exited my trade Monday morning (you will see in the comments section).  It also helped that I was way ahead on the trade.  

1.  Every report I read on drill results, companies are producing wells (such as Utica Shale) that are 2/3s gas and 1/3 oil.  These companies are happy to drill these wells just for the oil and any natural gas is a bonus.  Some companies are being very aggressive such as GPOR with their release here.  (Even though this report is dated, I just read it over the weekend).

2.  We see more efficiency (lower costs) with drilling being done.  NBR is feeling the effects of this with utilization rates down as well as earnings estimates.  You can also see this in NFX presentation on December 5th (page 8).  A greater then 50% gain in efficiency and cost/lateral foot YTD 2012.  Even though these wells are less 'gassy', efficiency will drive lower costs and higher values to encourage further drilling.

3.  There are also plenty of leases where you need to drill in order for the lease to be held by production.  It is either use it or lose it and wells are being drilled, even if only marginally economic, to hold the production for better times.

So the new trade is take the rally today and sell at the 120EMA of 3.41.  I sold the March 3.40 NG calls for 0.075.  I expect to hold the trade til expiration but will update on the comments section if needed.

I am net long NFX and net short GPOR.  The quick story is that I believe NFX is valued for its oil assets and any increase (even though I am arguing against it in this post) in Natural Gas pricing will help lift the stock.  I am short GPOR on valuation as I believe that hype from their 'big' well in Utica (discussed on seekingalpha) is already priced in. 

I am also net long NBR (and been wrong), which I will detail in another post shortly.  

2 comments:

  1. Here is a good article from seekingalpha analyzing some increased rig counts.

    http://seekingalpha.com/article/1102641-natural-gas-will-2013-goldilocks-turn-into-a-bear

    I agree with the authors conclusions, that drilling rigs come back at $4.00 strip price. Current strip prices do not reach $4.00 until November 2014 currently.

    http://www.visionfinancialmarkets.com/futures/tools/quotes/?page=quote&sym=NGG13&mode=i

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  2. Even though the weather was extremely cold over the entire US, the net withdraw in storage only met the 5 year average and did not exceed withdrawal meaningfully.

    I still believe that we see a 2 handle in natural gas before we see a 4 handle. I expect there to be talk of storage reaching capacity this summer, pressuring prices.

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