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Page added on March 10, 2014
Long Term, Is Natural Gas Better Than Oil?
The chart below from the Energy Information Administration shows current projections for U.S. energy production. Notice that crude oil production is slated to peak by around 2020 and then slowly decline. In contrast, natural gas is expected to keep climbing through 2040.
Source: EIA
Furthermore, prices for natural gas are projected to climb from their current low levels:
If you see these trends of growing production and rising prices as an investment opportunity, then there are a few different ways to approach it.
Major player in Marcellus
One of the companies sitting on the some of the most prolific natural gas wells in the Marcellus shale is Cabot Oil & Gas (NYSE: COG ) . Cabot claims to have 17 of the top 20 producing natural gas wells in the Marcellus play. This has contributed to some of the lowest production costs in the country. Cabot claims its total costs for natural gas production were $3.03 per thousand cubic feet equivalent, or Mcfe, in 2013, an 18% improvement over 2012.
For comparison, Range Resources, which is also active in the Marcellus, has production costs of approximately $3.60 per Mcfe.
These prolific wells did wonders for Cabot in 2013. Total production was 55% higher than 2012, cash flow was 57% higher, and net income 112 % higher. This production was without the benefit of acquisitions. Topping all this off was a 42% increase in proved natural gas reserves.
With all this good news, why did the stock get whacked? First, the stock was set up for a correction after climbing 50% over the past year. Production guidance was for a 25% to 40% increase in 2014 — not quite as strong as 2013’s increase. Furthermore, Cabot is having problems getting a decent price on its natural gas despite the high demand caused by a cold winter. A lack of takeaway capacity (e.g. pipelines) is contributing to this pricing problem.
Put another way, Cabot is producing too much gas for its own good and is seeing lower prices as a result.
What about natural gas pipelines, then?
Cabot’s takeaway problems will likely resolve over time, in part because Williams Companies (NYSE: WMB ) signed a deal to build a new pipeline to Cabot’s Marcellus assets. Williams operates two stretches of pipelines in the United States and a third pipeline in Canada. The interstate pipelines are operated by Williams Partners (NYSE: WPZ ) , a master limited partnership majority owned by Williams Companies. These pipelines handle natural gas and natural gas liquids.
Williams plans on spending about $26 billion in the next five years to expand its operations in the United States, Canada, and offshore Gulf Coast. Most of the capital will be spent on the U.S. Atlantic and Gulf coasts. Three pipeline projects are slated for completion this year with others to follow through 2018. These projects are supported by 15-year contracts.
All of this bodes well for investors. Not that they have done badly in the past — Williams Companies has steadily risen for five years, while Williams Partners had a rapid gain back in 2009-2012 but has slowly declined ever since. Williams Companies’ dividend grew from a quarterly $0.11 per share in 2009 to $0.4025 in the most recent quarter. Williams Partners’ distribution grew from $0.635 to $0.8925 in that same period. Williams Companies currently yields 3.9%, Williams Partners, 7.2%.
A little oil, a lot of gas
Another company producing natural gas is Vanguard Natural Resources (NASDAQ: VNR ) . This company acquires mature, proven natural gas and oil assets that require a minimum of capital. In this way, Vanguard seeks to maximize output and distributions with the least amount of capital expenditures. While many similar companies eschew natural gas plays, Vanguard embraces them. In fact, natural gas represented roughly 65% of all production in 2013.
Vanguard’s acquisitions since 2007 reflect this production bias. Twenty deals were sealed and roughly 66% of these assets were natural gas. As a result, Vanguard’s proved reserves grew from 67 billion cubic feet of gas to 1.8 trillion cubic feet. Amazing what spending $3.4 billion can do for your company. 2013 saw two deals finalized that were mostly liquids plays and one deal so far in 2014, which is mostly gas. For the record, Vanguard reported a near doubling of production of all commodities in 2013 compared to 2012.
One recent acquisition involved assets in Wyoming: the Jonas Fields and Pinedale, specifically. In some ways, these plays fit with Vanguard’s strategy of acquiring natural gas fields; the properties in question are roughly 80% natural gas, 16% natural gas liquids, and 4% oil.
What is different in this deal is Vanguard will spend money on exploration activities, something it usually avoids. Admittedly, it’s a low-risk venture (another Vanguard trait), and the company will work with two operators in the field to improve the odds of steady growth. Time will tell if this exploration venture pans out.
Final Foolish thoughts
Of all these companies, I like the two Williams companies the best. Midstream operations strike me as the safest bet in the energy business. If you need income now, buy Williams Partners. If you can wait and take advantage of dividend reinvesting and dividend growth, Williams Companies offers a compelling investment.
21 Comments on "Long Term, Is Natural Gas Better Than Oil?"
J-Gav on Mon, 10th Mar 2014 4:41 pm
I have little time or sympathy to waste on fooldotcom but at least here for once he does have the cojones to go out on a limb in investment advice – so people who follow that advice should be able to judge its validity quite clearly : good news or excrement?
rockman on Mon, 10th Mar 2014 5:08 pm
The EIA chart is truly hilarious IMHO. It goes back to an important philosophy: be sure you know what you know but, more important, know what you don’t know. Look at the price volatility just from 1990 to 2012: up 400%+…down 70%+. And then they have the audacity to project a nice steady rise in NG for the next 28 years. IOW as we go further down the PO path the system will become stable and predictable? They obviously can’t predict NG prices in 2030 any better than they predicted the price spike in 2006…or the crash in 2011. Yet they apparently have no trouble offering that projection to our political leaders who are trying to develop logical energy policies to address our future. IMHO what’s even scarier than the EIA making such a projection is that our political leadership might believe it.
Northwest Resident on Mon, 10th Mar 2014 6:23 pm
“IMHO what’s even scarier than the EIA making such a projection is that our political leadership might believe it.”
I agree. IF our so-called political leaders actually are naïve enough to believe the EIA fluff, then we are indeed in deep, deep doo-doo.
My only consolation is that I know for a fact the U.S. Military doesn’t buy that EIA crap. Those guys are well aware of the approaching energy crunch, they see the strategic dangers coming, both internationally and nationally, and they are preparing to meet those security challenges. I *like* to believe that because the military knows what is coming, they might at some point sit the president and his closest advisors down for a “get acquainted with reality” session — maybe invite a few of the guys from the CIA and other security agencies, maybe add a couple of oil industry execs who DO know the truth even if they don’t say so publicly. That isn’t expecting too much is it — that America’s top security experts would let at least the president know that we’re headed for real problems. At least, so it seems to me.
Davy, Hermann, MO on Mon, 10th Mar 2014 6:46 pm
In my opinion there is no way in hell Nat Gas will increase if oil is decreasing. There is too much infrastructure required for gas to grow without a corresponding growth in the economy to support that societal expense. Oil drops and so does the economy. We know this is the case and the crazy “lobby of plenty and human exceptionalism” is not going to change that equation. The same is true for AltE build out that is not going to happen. Gas is not a 1 for 1 substitute for oil. Gas is better than the other energy sources to substitute but not much better. As soon as the financial bubble pops we will see a build out of gas globally die on the vine. If the financial system limps along it will still be far from certain if the necessary capex can be generated to cover some gas build out. This is especially true when big oil will be competing for that capex.
rollin on Mon, 10th Mar 2014 6:51 pm
From the BAU point of view the above graph is conservative. From the point of view of anyone who understands the predicaments facing the world during the next two decades, the graph to 2040 is sheer unfounded speculation.
How much further we can prop up the limb we keep creeping along is anyone’s guess. We can all hear the cracking sound though.
Nony on Mon, 10th Mar 2014 6:58 pm
Rock, basically I agree. Although I think peakers also overstate their certainty and draw curves and crap. Even for oil, I’m still not 100% certain we could not have another price crash (not saying we will and actually I doubt it, but I can’t rule it out…look at 85 to 2005: expanding volume and low prices for a long period.)
Also, I think if you chatted with the EIA or whatever and had a good discussion that they would be surprisingly aware of the uncertainties and able to have a good talk. But yeah, they do put out those pretty prognostications.
What do we know though? I think we know that gas reserves have significantly increased and that shale gas can be extracted at low costs (after all, it is squeezing out conventional gas). Berman was off with his negativism in 2009. The “bubble” keeps getting bigger and he is not being open enough to changing his views with time and info.
Oh…and yeah Mitchell had been screwing around with the Barnett since the 80s, but the whole thing did not kick off until 2004 or so in terms of any volume. And it didn’t start in the best play (Marcellus), so this was not such an obvious case (as in shale oil) of technology and geology just sitting on the shelf waiting for a price signal.
And yeah, the high gas price kicked things into gear at first…but it’s a very different situation where shale gas has “legs”. In the Bakken, that play turns off when oil drops back to 40 (we saw this in 2008). With gas, we see expanding total US volume, expanding shale share and all of that during a prolonged glut (low prices).
I think looking at it objectively, you have to give the peakers being right on oil and the cornies right on gas. For oil, price is high and I accept that as POD. (Not the drops that lots of people depicted, not even the prices that serious guys like James Hamilton predicted, but still at least 3 times higher than a “good price”.)
But for gas, there has been a fundamental shift in our view on what can be extracted cheaply. On gas, the cornies are right and we face a fundamentally different dynamic going forward than before. Definitely not a simple depletion story in gas.
Nony on Mon, 10th Mar 2014 7:02 pm
Oh…and I can’t rule out 200/bbl either (for oil). I’m just being honest about the lack of certainty. My Bayesian estimate is centered on the futures price: slight downtrend, but staying “bad”. But even that may just be an averaging of boom and bust, rather than a belief in that specific price!
Nony on Mon, 10th Mar 2014 8:05 pm
Oh, and any kind of discussion of stocks should involve valuation. In essence, it’s not enough to say that you think the Marcellus is a good play or even that Cabot is a well operated company. You have to show analysis to support that the play (or Cabot) are better than the market believes.
shortonoil on Mon, 10th Mar 2014 8:29 pm
With more than a third of North American’s NG now coming from tight formations, and conventional declining by 24% a year, a look at what is happening in the major shale gas plays is enlightening.
Average First Year Decline
Barnett……….64%
Fayetteville….65%
Woodford……66%
Haynesville…77%
Marcellus……64%
Muskwa……..71%
Utica………….65%
Monteny…….54%
Anyone who thinks that shale gas will be playing a major role a few years down the road has spent much effort in looking at the situation!
http://www.thehillsgroup.org/
Nony on Mon, 10th Mar 2014 8:31 pm
But somehow despite those first year declines (and not many rigs drilling for gas), shale gas is still displacing conventional gas. I wonder how? Must be some pretty hefty IPs. 😉
Go, go, gas!!!!
rockman on Mon, 10th Mar 2014 8:49 pm
Nony – If you notice I try to never predict oil/NG prices. And for a simple reason: one has to be able to predict economic activity to forecast demand which hugely impacts prices. And I know I can’t do that worth a crap. LOL. Of course the dynamic is more complex than just the demand side but it still dominates IMHO. Also if one is going to predict prices it’s all the more difficult to predict short term prices. For those predicting folks I would like to seem them at least give their numbers in a yearly average. Just look at the huge price swings in NG 50%+ swings in less than 12 months. One could have predicted $8/mcf and $4/mcf in 2009 and have been correct in both guesses.
Nony on Mon, 10th Mar 2014 9:10 pm
NG has some seasonal issues and some JIT production issues and some transport issues. I think everyone knows that and it’s not some aha.
Do a trailing 12 months plot. (Or a 12 months average ahead futures plot.) Will still have volatility, but more showing the big picture: instead of seeing seasonality or very short spikes (like a week of $6 gas a month ago before it went back down to 4.50), we’ll see this story: genuine concern of high future gas prices around mid-late 2000s, followed by a glut, followed by prolonged low prices. And futures show that the betting money thinks that low cost pervails. And it’s already been like 4 years under 5 (yearly average).
I think at least with gas, it’s very different than a simple story of known supply (known geology, known technology, known supply cost curve). We’ve had low prices WHILE the volume went up significantly. That sure as heck is not a recession, demand shock creating low prices. It’s a supply story. An overcapacity glut and medium-long term view of more gas reserves and the success of shale gale.
I think we have to be open to how shale oil and gas are different. And even how gas and oil themselves are different. Cornies need to agree that Bakken/EF/Permian have limited lifetime and are not getting us back to 30/bbl oil. Peakers need to concede things are better in gasland.
I’ll give you the POD street cred on oil (and you sort of are semi, semi predicting it by emphasizing the current high price issues and describing this as validating “POD”, connecting price to depletion of cheap oil). But on gas, it’s a very different picture.
Every year that goes by makes Berman’s 2009 negativity more tired and his failure to update it makes him look less truth-seeking. And having the peeps here trotting out first year declines as some sort of “aha” is irrelevant. I could have a first year decline of 100% (!) that would not matter if the IP was juicy enough.
shortonoil on Mon, 10th Mar 2014 9:33 pm
For the shale plays there is also the matter of a huge intended (unintended) subsidy coming from the FED. The average interest on the 10 yr (the standard used in interest rate calculation) over the last 30 years has been 6.3%. Because of the FED’s QE (bond purchases) it is now 2.5%. The FED is now keeping the long bond rate artificially low so the Treasury can pay the interest on its $17 trillion debt. At market rates the US government wouldn’t be covering its interest payments with the tax receipts it is now receiving.
Using the Bakken as a proxy (because we have good numbers for it) at $8.5 million per well over their ten year life expectancy (114,000 barrels, IHS) the difference between 6.3% and 2.5% provides a $20/barrel subsidy to shale oil. An increased cost of $20/barrel would probably shut the shale industry down.
The shale industry now exists on unsustainable low interest rates, and unsustainable frantic drilling schedules. Like the housing industry, and now the equity markets it is a reflection of massif malfeasance on the part of the US government to live within a realistic budget. Like we have seen in the housing industry, and the decline in the American standard of living, it will end abruptly, and badly.
http://www.thehillsgroup.org/
shortonoil on Mon, 10th Mar 2014 10:06 pm
“But somehow despite those first year declines (and not many rigs drilling for gas), shale gas is still displacing conventional gas. I wonder how? Must be some pretty hefty IPs.”
As usual your not paying much attention. US Withdraws from Gas Wells has been falling since 2006 when it peaked at 1.566 tcf. Shale gas is not winning, conventional is declining. With 65% first year decline rates shale is not likely to compensate for conventional decline for more than a couple of years. That is, if they continue to drill like mad; which is questionable with the monetary, financial system in the state its in. NG is still selling below its production costs, and only mounting debt is keeping it going. Mounting debt comes to an end, ALWAYS!
http://www.eia.gov/dnav/ng/hist/n9011us2m.htm
Nony on Mon, 10th Mar 2014 10:22 pm
Interesting chart, thanks.
Northwest Resident on Mon, 10th Mar 2014 10:25 pm
shortonoil — Thanks for driving a stake through the heart of that vampire. It was a sweet sight to witness, brutal though it was.
“…only mounting debt is keeping it going. Mounting debt comes to an end, ALWAYS!”
Like an egg dropped from the top of the Empire State Building — it may be a wild ride down, but eventually there is only one conclusion: Splat!
rockman on Tue, 11th Mar 2014 11:36 am
Exactly: operators are choosing what little pure shale gas drilling is happening over conventional plays primarily because that’s where most of the prospects remain. As most have seen me post before my privco participated in $400 million of conventional NG drilling during our first 3 years of existence. In the last 2 years that has dropped to $zero. Not that there aren’t some viable conventional NG projects out there but my owner only invest in relatively high yield ventures. And as a rule that’s not onshore conventional NG today. Add another couple of $bucks/mcf and we might start moving back into NG.
So it all goes back to the inevitable drive by pubcos, be it unconventional oil or NG, to add booked proven reserves regardless of how slim the profit margin. I can’t quantify it but if it weren’t for the drive to maintain stock valuations we would be producing much less oil/NG today IMHO.
Kenz300 on Tue, 11th Mar 2014 12:12 pm
Elon Musk Thoughts on transitioning to 100% renewable energy – YouTube
http://www.youtube.com/watch?v=rce5RZHCzLk
Davy, Hermann, MO on Tue, 11th Mar 2014 12:41 pm
Kenz if you admit that we will transition to 100% renewables but in a collapsed society and economy I will believe you. The renewables you preach about will still be in use but will wear out within their useful lives. The economy will not be there to repair or replace them. We need to think about wind, solar, and small hydro that is of the old technology pre fossil fuel. Windmills that mechanically grind grain or manufacture something. Solar for heating water, cooking, or doing a distinct mechanical function. Here in the Missouri Ozarks we had multiple uses for our river water in mills in the 1800’s. These renewables are the 100% we are going to be involved with. Anytime you make a conversion with AltE sources efficiency is lost. This is especially true if you try to further store the power. I am an ardent believer in AltE for the individual. You should have low tech, low cost, low power solar for small power items like lights, electronics, and small appliances. Solar hot water is a great idea. When the grid destabilizes these sources will provide the basics. The whole house systems are fine but I think they are pricy and complex. With the grid available now and probably for years in some form I feel utilizing this available resource is a wise move. There are so many other places to put your pepper dollars. The best thing one can do is change their lifestyle to low power, low tech, seasonal, and variable in everything from diet, leisure, and home choices.
Davy, Hermann, MO on Tue, 11th Mar 2014 12:47 pm
Rock, I imagine you seen this interview. I am not sure why it has not hit this site. I found it very supportive of the thoughts I see here on this discussion board:
http://oilprice.com/Interviews/Shale-the-Last-Oil-and-Gas-Train-Interview-with-Arthur-Berman.html
Nony on Tue, 11th Mar 2014 4:21 pm
Rock: Don’t worry about negative margin. We’ll make it up with volume. 😉