Demand for natural gas will rise as LNG export capacity grows

Higher prices seem likely

The Energy Information Administration (EIA) reports that approved pipelines to supply feed gas to LNG export terminals amount to 20 Bcf/day of capacity while about 10 Bcf/day of export terminal capacity is under construction at present, about equal to the “under construction” capacity of the approved pipelines.

Domestic U.S. natural gas demand at present runs about 94 Bcf/day with seasonal peaks and valleys owing to heating demand in winter and cooling demand in summer. The U.S. exports about 6 Bcf/day to Mexico and another approximately 15 Bcf/day of LNG while importing about 5 Bcf/day from Canada. The net effect of the LNG expansion will tighten markets for natural gas with upward pressure on prices.

American natural gas output is largely “associated gas” arising from oil wells, with shale gas wells supplying the balance. Both associated gas and shale gas experience relatively high decline rates compelling substantial capital to maintain or expand production of gas with the primary motivation for oil wells and their associated gas production coming from world oil prices while shale gas supplies will follow domestic natural gas prices both up and down.

The EIA projects natural gas prices over the next two decades in the range of US$2.00 to US$6.00 per million British Thermal Units (equal to a gigajoule) for domestic natural gas depending to a large extent on the LNG price and oil price environment.

Europe is short of natural gas and has been too dependent on Russian gas supplies for comfort in a geopolitical environment where Russia is in the doghouse owing to the war in Ukraine which lingers on. There are few alternatives to natural gas for Europe’s energy needs despite the trillions Europe has spent on so-called “renewables” which have done little to displace demand for oil and gas but done a lot to drive up the price of electricity and contribute to inflation still plaguing European and U.K. economies. In my opinion, demand for LNG will keep those prices relatively high and leftist animosity to safe and reliable fossil fuels will likely keep capital expenditures in check and limit growth in oil supplies to more or less keep pace with demand, so oil prices are more likely to remain firm than collapse, although they will be volatile.

The environment points to relatively strong prices for North American natural gas. The EIA reference projection of US$4.00 per gigajoule seems conservative to me, but assuming it prevails what does that mean for Canadian and U.S. natural gas producers?

A US$4.00 per gigajoule Henry Hub price for natural gas will likely manifest itself in a Canadian price of CDN$3.75 or so [US$4.00 at Gulf Coast less US$1.20 basis adjusted for foreign exchange at 1.34 CDN/US is (4.00-1.20) x 1.34 = $3.75]. Based on a CDN$3.75 per gigajoule price for dry natural gas, I model the following values for key natural gas players in the WCSB (I have not modeled Canadian Natural Resources notwithstanding its significant exposure to natural gas prices since CNQ is primarily an oil play).

Tourmaline Oil - $43.00 per share
ARC Resources - $17.10 per share
Peyto - $24.00 per share
Birchcliff - $7.25 per share
Spartan Delta - $8.50 per share

In times of shortage, natural gas prices can rise rapidly - even overnight. These estimates assume a steady price for an extended period. All companies named are highly leveraged to natural gas price changes in both directions.

I have long positions in Peyto, Birchcliff and Spartan Delta and no holding in ARC or Tourmaline both of which I consider overvalued today.