Lower for Longer: A New Normal for U.S. Natural Gas Prices
Examining the impact of abundant low-cost supply--and uncertainty in global oil markets--on the domestic natural gas complex.
In the face of continued growth of low-cost supply, we are reducing our midcycle price estimate for U.S. natural gas by 25%, to $4 per thousand cubic feet. While demand tailwinds from exports and industrial consumption will help balance the domestic gas market, ongoing cost pressures from efficiency gains and excess services capacity--as well as the crowding out of higher-cost production by world-class resources like the Marcellus Shale and associated volumes from oil-rich areas like the Eagle Ford and Permian--justify our revised outlook. Even under our lower price deck, however, undervalued, cost-advantaged investment opportunities remain. Our top picks among natural gas-focused exploration and production firms are Cabot Oil & Gas (COG), Range Resources (RRC), Antero Resources (AR), and Southwestern Energy (SWN).
U.S. Natural Gas Supply
Domestic natural gas production has been on a tear over the past several years--up 25% since 2009 to more than 70 billion cubic feet per day--thanks to ongoing development of highly productive areas like the Marcellus Shale in Pennsylvania as well as associated gas volumes from oil-rich plays like the Eagle Ford Shale in south Texas. While production growth is likely to slow in the near term as upstream firms hit the brakes on oil-directed drilling, the wealth of low-cost drilling inventory in areas like the Marcellus and Utica--aided by an eventual recovery in oil prices and a ramp-up in associated gas production--points to continued growth in volumes through the end of this decade and beyond. Our forecast calls for a compound annual growth rate of 4% through 2020, with production reaching almost 90 bcf/d. We estimate most of this incremental production--primarily from the Marcellus, Utica, and oil-rich areas like Texas, Colorado, and North Dakota--can be brought on line at prices lower than $4/mcf.
Mark Hanson does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.