Energy Report: Lower natural gas prices past shadow over Fayetteville Shale

Recent sideways and downward pressure on the price of natural gas is causing some consternation in the natural gas industry, including companies that operate in the Fayetteville Shale.

In late August, natural gas prices on Thursday slumped to a record low for the year after the government reported a rise in U.S. supplies. On Aug. 26, the contract for September delivery gave up 4.9 cents at $3.822 per 1,000 cubic feet on the New York Mercantile Exchange. Earlier in the day, it hit a 2010 low of $3.794.

Last week, the U.S. Energy Information Administration again lowered its 2011 expectation for natural gas prices in 2011, adding yet another blip in the much-ballyhooed economic projections of the Fayetteville Shale.

Now, the EIA expects the Henry Hub spot price will average $4.76 per MMBtu in 2011, down $0.22 per MMBtu from last month’s outlook by the Department of Energy’s in-house research group.

SHALE PLAY
Although natural gas prices are not as low as a year ago, when natural gas prices bottomed out at around $2.50 per Mcf, Fayetteville Shale and other shale play producers were hoping to enter 2011 with prices moving out of an extended slump.

In its second quarter earnings conference call, Fayetteville Shale leader Southwestern Energy said it realized an average gas price of $4.27 per Mcf in second quarter of 2010, down 15% from the prior year period.

Without strong hedging positions that lifted the company’s average realized gas price by approximately $0.58 per Mcf, Southwestern’s second quarter earnings would have not have met expectations.

"We currently have approximately 87 (billion cubit feet) Bcf of our remaining 2010 projected natural gas production hedged through fixed price swaps or collars at a weighted average floor price of $6.26 per Mcf," the company said. "This represents a little over 40% of our expected production in the third and fourth quarters."

Southwestern increased its hedging position in 2011 and 2012. The Fayetteville shale leader has 92 Bcf of its 2011 forecasted gas production hedged at an average floor price of $5.61 and approximately 80 Bcf of our 2012 forecasted gas production at a floor price of $5.50 per Mcf.

CONTINUED LOW PRICES
What those positions mean is that the Southwestern’s executive team doesn’t believe the price for natural gas at the wellhead will move much higher over the next few years.

Wall Street agrees.

RBC Capital Markets analyst Jacques Rousseau this week cut his 2010 projections for natural gas prices to $4.60 per million BTUs, down from an earlier estimate of $5. Next year, Rousseau lowered his estimates to $5 from $5.57, and only sees a modestly higher price in 2012 at $5.50 per million BTUs.

Many of the rosy economic projections in the Fayetteville Shale was based on 2005-2008 information, when wellhead prices ranged between $6 and $8 per mcf. While hedging programs protect bigger players like Southwestern, XTO Energy and Chesapeaker, smaller Fayetteville Shale operators like Petrohawk are considering selling assets in the Arkansas play or have exited altogether.

Still, Southwestern has announced a planned capital investment program for 2010 of approximately $2.1 billion, including approximately $1.5 billion of planned investments in its Fayetteville Shale play in Arkansas.

Southwestern CEO Steve Meuller has said the oil and gas operator would "accelerate the development of our Fayetteville Shale play if gas prices do rebound in 2010."

Notwithstanding a hurricane-induced supply disruption, chances of that happening are getting slimmer as the year winds down.

MOTOR FUEL MOVES
In other state energy news, pump prices for a gallon of regular unleaded gasoline are trending downward in most regions of the state.

According to AAA’s daily Fuel Gauge report, Arkansas motorist are paying $2.58 per gallon for regular unleaded.

Pump prices in Arkansas’ metropolitan areas range from a low of $2.51 per gallon in Pine Bluff to a high of nearly $2.64 in Northwest Arkansas. Retail prices in Little Rock are averaging $2.54 per gallon, while travelers to Fort Smith and Texarkana are paying about $2.61 and $2.62 per gallon, respectively, to fill up their tanks.

Nationwide, retail gasoline prices for regular unleaded are averaging about $2.72 per gallon, about 14 cents higher than a year ago. Retail diesel fuel prices increased  to $2.94 per gallon, up 1 cent compared to last week.

Meanwhile, a barrel of light, sweet crude oil for October delivery was trading at $75.36, down 1.9% or $1.44. Crude hit a one-month high earlier this week on the New York Mercantile Exchange at nearly $78 per barrel.