Natural Gas Storage Hits New High

In its weekly release yesterday, the Energy Information Administration (EIA) reported a bigger-than-expected 69 billion cubic feet (Bcf) addition to natural gas stockpiles for the week ended October 2.

This takes the current storage level to a new record high of 3.66 trillion cubic feet (Tcf), which is up 14.9% from last year's level and 15.1% above the five-year range (as clear from the nearby chart from the EIA). Current stocks are 473 Bcf above last year’s level and 480 Bcf above the five-year average. The inventory addition was lower than the five-year-average injection of 70 Bcf and last year's build of 87 Bcf.
 

 
The relentless increase in gas storage levels has meant that with four weeks remaining in the storage injection season, stockpiles are already 94% full. At this pace, by October 31, which is the end of the injection season, inventories could easily test the maximum capacity of 3.89 Tcf.

Despite the bearish EIA report, natural gas prices (we are referring to Henry Hub spot prices here) have stayed firm over the past few weeks, currently settling at around $4.00 per million Btu (MMBtu), helped by indications of an economic rebound. However, prices are still way off the July 2008 highs, when they rallied to over $13 per MMBtu, before trending down to seven-year low level of sub-$2 per MMBtu recently.

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 did little to disrupt offshore production and onshore refineries.

But with U.S. natural gas storage levels remaining 15% 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 - Analyst Report), Chesapeake Energy (CHK - Analyst Report), EOG Resources (EOG - Analyst Report), Devon Energy Corp. (DVN - Analyst Report) and EnCana Corp. (ECA - Analyst Report). We currently rate shares of these companies as Neutral.

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