Why follow natural gas industry fundamentals and future prices?

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Natural gas production

As we’ve seen earlier in this series, nearly all of Southwestern’s production is natural gas. In 3Q13, the company produced 172.4 bcfe (billions of cubic feet equivalent), of which 172.1 bcf was natural gas. So natural gas prices are an incredibly important determinant of revenues and earnings for the company.

Natural gas prices over the past few years have dropped sharply

Since hitting highs of over $13 per MMBtu in 2008, natural gas prices have remained under $5 per MMBtu for nearly four years, at points dropping even below $2 per MMBtu.

This is because natural gas production has increased rapidly over the past several years, as technologies like hydraulic fracturing and horizontal drilling have unlocked new areas to be drilled economically.

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According to the U.S. Energy Information Administration (EIA), natural gas production has reached ~2.2 trillion cubic feet (Tcfe) of production by October 2013 and is expected to further grow by 56% between 2012 and 2040, reaching 37.6 Tcfe of production, with the majority of the production coming from shale plays drilled using these new technologies.

However, as companies rushed in to drill natural gas, a supply glut caused prices to plunge. Also, natural gas is difficult and costly to export, as its gaseous state requires expensive equipment to cool and condense it into a shippable form. So, while supply has increased, the market for U.S. natural gas has largely been restricted to North America. See Must-know: Why natural gas prices fell 6% last week for more analysis.

Southwestern Energy management’s comments on natural gas prices

According to Steven Mueller, CEO of SWN, company-operated volumes represent over 3% of the total U.S. natural gas supply. With regard to the natural gas production trend, he commented:

  • “As I look at it in the future, generally I think production is going to stubbornly stay high for the next twelve to eighteen months. I don’t see much dip in the production. It has started to flatten out, and will stay pretty much flat for a while, before you actually see it tip over.”
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