Natural Gas Inventories Rise Less

In its weekly release yesterday, the Energy Information Administration (EIA) reported a less-than-expected 69 billion cubic feet (Bcf) weekly addition to natural gas stockpiles for the week ended September 4.

This takes the current storage level to 3.39 trillion cubic feet (Tcf), which is up 17.1% from last year's level and 17.4% above the five-year range (as clear from the nearby chart from the EIA). Current stocks are 495 Bcf above last year’s level and 503 Bcf above the five-year average.
 

 
The inventory addition was higher than last year's build of 63 Bcf and the five-year-average injection of 67 Bcf. The relentless increase in gas storage levels continue to add to the long list of issues weighing on the commodity. At this pace, inventories are on course to surpass the all-time high level of 3.57 Tcf recorded at the end of October 2007.
 
Natural gas prices rallied earlier last year, reaching over $13 per million Btu (MMBtu) in July 2008, before trending down. Prices have since plummeted to the current seven-year low level of sub-$3 per MMBtu (we are referring to Henry Hub spot prices here).

Continued strong domestic production (from a number of unconventional natural gas fields) and recessionary consumption (due to the economic downturn), particularly in the industrial sector, are at the core of the commodity's current woes. Additionally, the Atlantic hurricane season has done little to disrupt offshore production and onshore refineries.

The supply picture is expected to reverse in the coming months as the lagging effect of the sharp drop in domestic drilling activity takes effect. Partly offsetting the production drop is the expected ramp-up of LNG imports this year.

The commodity’s weak near-term outlook, coupled with the ongoing credit market turmoil, has prompted natural gas producers to curtail capital expenditure plans for 2009. As a result, this has been an extremely difficult period for natural gas and related energy support plays.

Considering the plunge in the commodity prices, we remain cautious on natural gas-focused E&P players such as XTO Energy (XTO), Chesapeake Energy (CHK - Analyst Report), EOG Resources (EOG - Analyst Report) and EnCana Corp. (ECA - Analyst Report). We currently rate shares of these companies as Neutral.

We also remain wary of land drillers such Nabors Industries (NBR - Analyst Report) and natural gas-centric service providers such as BJ Services (BJS), given the extent of excess capacity in the sector that is expected to weigh on dayrates and margins well into next year.

However, with the U.S. natural gas rig count edging up over 700, the seventh successive weekly gain, we see producers slowly ramping back activity. Considering this, we have recently upgraded these two stocks (NBR and BJS) from Underperform to Neutral.

Read the full analyst report on XTO

Read the full analyst report on CHK

Read the full analyst report on EOG

Read the full analyst report on ECA

Read the full analyst report on NBR

Read the full analyst report on BJS