US Natural Gas – Not Out of the Woods Yet!
US natural gas pricing remains fairly close to its 52 week high (Exhibit 1), as the very low inventories created by the cold winter are showing limited signs of rebuild (Exhibit 2). This is happening at a time in the year when we would expect the rate of inventory rebuild to accelerate – ahead of the summer, when demand rises again (electrical power – cooling).
Despite many weeks of natural gas pricing above or close to $4.50 per MMBTU, we are not seeing a supply response in terms of increased on-shore rig counts. The Baker Hughes rig count increased meaningfully last week – by 30 rigs – but 28 of these were oil and only 2 gas (Exhibit 3).
In other words, producers either do not see the economics working at $4.50, or they have little confidence that prices will stay at these levels for long. Most of the shale based oil plays have significant associated NGLs and natural gas, and in Texas (for the most part) there is infrastructure to bring these products to sources of demand. Most of the increased rig count was in Texas.
Ethane pricing has weakened relative to natural gas, and extraction margins, which jumped close to break-even in late February and early March and negative once again (Exhibit 4). Ethane pricing however remains well above this time last year (Exhibit 5 – last 16 months Mt Belview and Conway).
Ethylene spot and contract pricing is falling in the US, suggesting lower margins for the major sellers of ethylene in Q2 than at the same time last year given higher ethane prices. It is not clear that there is much strength in pricing in any of the major ethylene derivatives in the second quarter and consequently Q2 2014 profitability in the US is unlikely to be better than Q2 2013 on a per pound of product basis.
The risk is that natural gas prices react to the lack of inventory build by rising further – and far enough to convince E&P companies that more natural gas drilling activity is needed. If natural gas were to rise into the $5.00-6.00 range all of the major basic chemical companies in the US would see negative revisions for Q2 and possibly Q3 2014.
In Exhibit 6 we show expectation for each of the natural gas levered names for Q2 and Q3 2014 and put these into context with Q2 and Q3 2013 numbers and anticipated growth.