An important report from Oil Drum, published at the Business Insider, explains that the Marcellus shale play will not break even when natural gas is selling at less than $7/Mcf, as the result of faster than expected decline rates for the wells. Why then do companies continue to drill? The report says:
Returning to the broader subject of shale plays in general, why do operators keep drilling while their own over-production has depressed the price of natural gas by half of its value since January 2010? It seems fairly clear at this time that the land is the play, and not the gas. The extremely high prices for land in all of these plays has produced a commodity market more attractive than the natural gas produced.
Foreign companies invest in U.S. shale plays for different reasons but the most often-stated reason is to learn about the technology that they may be able use to their advantage in future shale plays around the world. It is possible that some companies enter into joint ventures with U.S. shale operators for strategic reasons based on fears of future resource scarcity particularly as China expands its efforts to control everything from petroleum and minerals to rare earth metals around the world.
Read more: http://www.businessinsider.com/marcellus-shale-disappointment-2010-10#ixzz144mz6QDy
But with currently reported natural gas futures at $3.84, it does not seem like this play is going to be viable. Indeed, the report explains that while debt for Marcellus-focused companies has gone up and reserves have increased somewhat, shareholders’ equity has dropped dramatically. To add insult to injury, the states of Pennsylvania and New York are placing moratoriums on new drilling in the play for fear of the new fracking technology that is used to exploit these wells, and in the case of Pennsylvania, because of a dispute between the republican legislature and the democrat Governor Edward Rendell over the drilling tax; of course, it’s the democrat who is insisting on a higher rate and has thus issued the moratorium. I wonder if Governor Rendell has read the Oil Drum report showing that the drilling is largely unprofitable in the region. This is no golden goose. But I suppose a brass goose can also be strangled by taxes.
As a result of this, I’ve decided to sell
50% 75% 100% (update 11 Nov) of my holdings in Enerplus (ERF.un: TSX; ERF: NY) which has a large Marcellus shale operation. This follows an excellent run for Enerplus, which still has many other great holdings. Along with Marcellus, Enerplus recently acquired some lands on the US side of the Bakken. I am uncomfortable with their large stake in the US with Obama at the helm–he illegally shut down drilling in the Gulf and he and the other democrats in the US intend to destroy the US-based energy industry, all while subsidizing Brazil and Soros. I will probably sink the funds that are now freed up into Pengrowth Energy and Penn West Energy, which are both listed as Action-List Buys by TD Newcrest. These can also be bought on the New York Stock exchange and they can thus add to my US dollar carry trade.
The bad news for Marcellus shale may turn out to be good news for conventional natural gas plays in Canada, and it would come at an excellent moment. The shale plays in the US have put great pressure on the prices causing a glut of available gas. I am maintaining my shares of Perpetual Energy (PMT:TSX) which dropped about 7% immediately after being trashed on BNN by Eric Nuttall of Sprott Asset Management
(hat tip: Devon Shire
), who said it is due for a dividend cut if natural gas prices don’t improve soon. Some think that dividend cut is already factored into the current price. I’m looking to buy in at $3.85-4.00. Nuttall, a cognoscente
of the Canadian oil industry, claims that no managed funds own Perpetual, only retail investors because of its high dividend yield. Ouch! He excused himself for previously recommending Terra Energy (TT:TSX), a natural gas weighted junior (which I started buying recently). So Nuttall is not inerrant.