An extended cold streak across much of the U.S. has pushed natural gas prices to their highest levels since September 2011. Briefly on Thursday and again in early trading today, prices topped $4 per million BTUs. That’s a 27 percent rally over the last five weeks and 73 percent higher than a year ago. With the U.S. Energy Information Administration expecting production to increase by just 0.7 percent this year, traders are placing more bullish bets on natural gas.
This is essentially the opposite of the story a year ago, when prices were on their way to bottoming out below $2 in April. Back then it appeared natural gas producers had shot themselves in the foot by over-drilling and crashing the price. As a result, the industry essentially cut in half the number of natural gas rigs operating in the field last year, from about 800 in January to a little more than 400 by the end of December, according to Baker Hughes (BHI), a Houston-based oil and gas services company. Despite higher prices, the rig count has essentially remained the same. It seems natural gas producers, burned by their own exuberance, are being more careful about overproducing.
Plus, thanks to all those shut-in wells, producers are still increasing output without needing to drill new wells. Last year, Pennsylvania increased its natural gas production 69 percent despite drilling fewer wells. That’s mostly because producers over-drilled a few years ago and had to wait for pipelines and infrastructure to get hooked up. According to the Pennsylvania Department of Energy, a significant portion of wells that began producing in 2012 were drilled earlier.
This new pipeline infrastructure means that Pennsylvania’s Marcellus shale is now the largest-producing formation in the country, pushing it past the Haynesville formation in Texas, according to a report from IHS (IHS). It’s also made Marcellus more profitable to operate in than Haynesville. According to calculations by Laurent Key, a natural gas analyst at Société Générale (GLE:FP), the average break-even price for Marcellus dry gas (as opposed to wet, which contains ethane and propane) is $3.08, vs. $3.21 in Haynesville.
This is adding nicely to producers’ balance sheets, particularly those early movers who have been operating in the Marcellus for a few years. Shares of Fort Worth-based Range Resources (RRC), which drilled its first horizontal well there in 2006, are up 60 percent since the end of last year. Shares of Cabot Oil & Gas (COG) in Houston are up 42 percent since early January and have more than doubled over the last 12 months. Both firms are trading near their 52-week highs.
Still, some analysts are striking a note of caution: This is typically the time of year when prices start to fade and supplies of natural gas begin to rise amid warmer weather. In a March 18 note to investors, asset manager Tudor Pickering recommended taking profits now and said that the fundamentals suggest a $4 ceiling.