http://www.marketoracle.co.uk/Article22042.html
The Energy Report: Atticus, on the institutional side, fund and pension managers are keeping their portfolios a little light on energy plays. What sort of event is needed to get the institutional side back to pre-2008 levels in terms of equity?
Atticus Lowe: Institutions are light on energy right now because nearly all of the independent oil and gas companies out there are leveraged to natural gas. The outlook for natural gas is pretty foggy, at least in the short term. The discovery of massive shale gas resources has been a blessing for the country and to some extent a curse for the exploration and production (E&P) industry. The implication of these shale gas discoveries is that natural gas prices are likely to remain quite elastic until demand increases.
There's so much shale gas out there that it's going to keep a cap on gas prices, albeit perhaps somewhat higher than where we are today. Credit Suisse recently averaged the cost structure of more than 40 independent producers and found the total unit cost to be $5.74 per Mcf of natural gas equivalent. Current prices are $4.25 and the 12-month strip is at $4.65, which creates a puzzling situation. Why would companies be drilling today if they can't make a return on capital, let alone break even? There are several reasons.
First off, oil prospects are scarce and most companies don't have much to drill other than natural gas prospects. Second, many companies are drilling to hold leases with the hope that natural gas prices will increase in the future and provide attractive economics for further drilling on these leases. In addition, many companies feel pressure from shareholders to spend money and increase production and cash flow. All of these issues are weighing on natural gas, and that has backed a lot of institutions away from energy.
The Energy Report: Atticus, on the institutional side, fund and pension managers are keeping their portfolios a little light on energy plays. What sort of event is needed to get the institutional side back to pre-2008 levels in terms of equity?
Atticus Lowe: Institutions are light on energy right now because nearly all of the independent oil and gas companies out there are leveraged to natural gas. The outlook for natural gas is pretty foggy, at least in the short term. The discovery of massive shale gas resources has been a blessing for the country and to some extent a curse for the exploration and production (E&P) industry. The implication of these shale gas discoveries is that natural gas prices are likely to remain quite elastic until demand increases.
There's so much shale gas out there that it's going to keep a cap on gas prices, albeit perhaps somewhat higher than where we are today. Credit Suisse recently averaged the cost structure of more than 40 independent producers and found the total unit cost to be $5.74 per Mcf of natural gas equivalent. Current prices are $4.25 and the 12-month strip is at $4.65, which creates a puzzling situation. Why would companies be drilling today if they can't make a return on capital, let alone break even? There are several reasons.
First off, oil prospects are scarce and most companies don't have much to drill other than natural gas prospects. Second, many companies are drilling to hold leases with the hope that natural gas prices will increase in the future and provide attractive economics for further drilling on these leases. In addition, many companies feel pressure from shareholders to spend money and increase production and cash flow. All of these issues are weighing on natural gas, and that has backed a lot of institutions away from energy.