Natural Gas Builds at Slower Pace

Yesterday, we received a mildly positive report from the federal government’s Energy Information Administration (EIA), showing a less-than-expected rise in natural gas supplies. Stockpiles held in underground storage in the lower 48 states rose by 66 billion cubic feet (Bcf) for the week ended September 11.

This takes the current storage level to 3.46 trillion cubic feet (Tcf), which is up 16.7% from last year's level and 16.4% above the five-year range (as clear from the nearby chart from the EIA). Current stocks are 496 Bcf above last year’s level and 487 Bcf above the five-year average. The inventory addition was lower than the five-year-average injection of 82 Bcf but slightly exceeded last year's build of 65 Bcf.
 

 
Overall, 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 to seven-year low level of sub-$2 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.

However, prices have rebounded somewhat over the past two weeks, currently settling at well over $3 per MMBtu, helped by back-to-back bullish storage data from the EIA as well as indications of an uptick in industrial production levels. But with U.S. natural gas storage levels still remaining 16% above their five-year average, we do not see any sustained price gains on the commodity front. This translates into limited upside for natural gas weighted companies and related support plays.

As a result, we remain cautious on natural gas-focused E&P players such as XTO Energy (XTO), Chesapeake Energy (CHK), EOG Resources (EOG), Devon Energy Corp. (DVN) and EnCana Corp. (ECA). We currently rate shares of these companies as Neutral.

We also maintain our Neutral recommendations for land drillers such Nabors Industries (NBR) and Patterson-UTI Energy (PTEN), as well as 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.

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 DVN

Read the full analyst report on ECA

Read the full analyst report on NBR

Read the full analyst report on PTEN

Read the full analyst report on BJS