Junk bonds, or to be more polite, “high-yield” bonds, have had a glorious bull run since the start of 2009. The Barclays index of total returns more than tripled in five years:
The extreme cold weather in the US is taking its toll on a whole host of energy products.
Most affected so far has been propane, which it turns out was understocked going into the season already:
As JBC Energy noted on Wednesday:
Moving to the light end of the barrel, US energy markets have experienced some unusual developments in recent weeks with severely cold weather leading to massive price fluctuations in propane, natural gas and ethane prices. Since the start of the cold weather in late December, overall propane stocks have declined by 10.6 million barrels to their lowest since June 2011, with a significant portion of these draws coming from the Midwest and as the Gulf Coast redirected flows northwards to supply weather affected areas.
This is well beyond the borders of our expertise, but John Kemp has a column critiquing the new report from the Harvard Belfer Center on the prospects for the shale boom to go international, and we think both worth passing along.
First is a summary from the long and detailed report by Leonardo Maugeri, who argues that a combination of technological and institutional constraints will prevent other countries from reaping similar benefits from shale as those enjoyed by the US: Read more
Since 2009 the stark contrast between oil prices (high) and natural gas prices (low) in the US has prompted questions, and visions of a new future of transport fuels.
There was some excitement that this might be gathering steam when Warren Buffett’s freight train network BNSF revealed it would trial LNG powered trains. This is the sort of thing that T. Boone Pickens has been pushing for years: use domestic natural gas as transport fuel to reduce costs, reduce emissions and diminish US dependence on oil imports, while providing a ‘bridge’ to renewables-based infrastructure. Read more
Oped pages in recent months have been regular hosts to pieces extolling some of the unsung benefits of the US shale-gas revolution. Some of these have gone so far as to proclaim that shale gas is, or will be, a significant benefit for the country’s entire economy.
Lately, though, the narrative is beginning to sound hollow. Read more
We’ve been reading a lot lately about the potential for cheap natural gas to replace oil-derived transport fuels in the US — and perhaps globally.
Much of this excitement overlooks some fundamentals of energy and commodities in general and the US natural gas sector in particular. The short version is that energy markets are incredibly difficult to predict, and adding interactions between energy sources only adds to the uncertainty. Read more
Okay. This is weird.
Looks like the analysts in Citi’s commodities team headed by Seth Kleinman (which includes the inimitable Ed Morse) didn’t get the memo. You know, the one about needing to talk up the carbon complex as much as possible?
After all, how else do you account for the disruptive tone of the following summary points? Read more
Eric Hunsader at Nanex presents us with a nice start to 2013 markets — a no less than an 8 per cent drop and subsequent clawback in natgas futures during early Wednesday trade:
In the last week of June, the Dept. of Energy released data for April showing that natural gas generated the same amount of power as coal-fired plants for the first time in recent history. Each fuel contributed 32% of total electric generation.
That’s from CreditSights (full note in the usual place), and here’s the visual going back a few years: Read more
As part of our asset monetization planning and capital expenditure budgeting process, we closely monitor the resulting effects on the amounts and timing of our sources and uses of funds, particularly as they affect our ability to maintain compliance with the financial covenants of our corporate revolving bank credit facility. While asset monetizations enhance our liquidity, sales of producing natural gas and oil properties adversely affect the amount of cash flow we generate and reduce the amount and value of collateral available to secure our obligations, both of which are exacerbated by low natural gas prices. Thus the assets we select and schedule for monetization, our budgeted capital expenditures and our commodity price forecasts are carefully considered as we project our future ability to comply with the requirements of our corporate credit facility. As a result, we may delay one or more of our currently planned asset monetizations, or select other assets for monetization, in order to maintain our compliance. Continued compliance, however, is subject to all the risks that may impact our business strategy.
From the not-there but then miraculously there, latest 10-Q. Read more
We keep reading about how US natural gas prices are depressed because of the glut of supply and unseasonably warm weather, driving down demand. Hard to argue with this – gas production has boomed since 2009 and the winter in North America has been rather balmy.
But there is another, quite unique, aspect to the natural gas market that we wanted to drill (pun intended) into: capacity. Read more
Chesapeake Energy plans to raise $12bn from asset sales in 2012, its latest effort to reduce debt amid the current slough in natural gas prices, the FT says. A deal to sell future output from the Granite Wash fields in Texas, rich in oil and liquid natural gas, would be included in the asset disposals. The company may also sell its entire stake in the Permian basin, an oil-rich field which will likely command a good price given the strength in crude prices, Bloomberg reports. Chesapeake, which aims to reduce its debt to $9.5bn by the end of 2012, also issued $1bn in bonds on Monday to pay off bank loans, taking advantage of calmer junk bond markets.
Chesapeake Energy is seeking to raise up to $12bn through asset sales this year, as the company seeks to plug a funding gap that has been exacerbated by low natural gas prices, reports the FT. The second-largest US gas producer had already responded to decade-low prices by idling rigs and seeking to raise production of oil and liquid natural gas, so-called “liquids”, which fetch higher prices. But Chesapeake still needs to raise funds to meet planned expenditures in 2012. The company said on Monday that it was nearing a deal to sell future output from the liquid-rich Granite Wash in the Texas panhandle. It said it also hopes to raise up to $8bn through joint ventures and asset disposals, including a possible sale of its entire interest in the Permian Basin in Texas, a thinly developed field, but one that is thought to be rich in oil and liquid gas.
The natural gas market has always behaved a little oddly.
First, it’s always been hugely seasonal, thus responsible for many a widow-maker trade. But now investors and traders have to contend with the impact of fracking too, a process which has by and large upped production to such a degree that prices have been knocked well and hard (à la the Baltic Dry Index): Read more
Chesapeake Energy, the second-largest US gas producer, said it will slash gas drilling by nearly half, the WSJ reports. The move is an abrupt turnabout by the company which calls itself “America’s Champion of Natural Gas” and helped pioneer the US shale gas boom. The announcement was greeted with exuberance by traders and investors, who have been waiting for months for a sign energy producers are willing to make dramatic changes in their gas-drilling behavior. Natural-gas futures jumped 7.8 per cent Monday to close at $2.525 per mmBTU, after two weeks of sharp declines.
US natural gas prices have sunk to the lowest point in a decade as the shale drilling boom threatens to fill the nation’s underground storage network, reports the FT. Nymex February gas was $2.402 per m British thermal units early Thursday, down almost 50 per cent from a year ago to return to levels last reached in early 2002. The decline marks a stunning turnround for a market that was building sea terminals to handle an anticipated flotilla of imports just a few years ago. Drillers’ use of horizontal drilling and hydraulic fracturing techniques has instead added decades to estimated reserves, allowing the US to ponder significant liquefied gas exports. Analysts say that with production at records and mild winter temperatures leaving inventories swollen, prices could approach $1 per m Btu later this year. US gas now costs just a third of prices in European markets and a sixth of gas sold in Japan, where it’s $15 per mBtu. An analysis unit of the US Department of Energy is on Thursday expected to release a study on the impacts of exporting liquefied natural gas to higher-priced markets.
UK military leaders have raised concerns that more than 80 per cent of the UK’s liquefied natural gas imports would be halted if Iran made good its threat to block the Strait of Hormuz, the FT reports, citing people within the Ministry of Defence and the Department of Climate Change. Ministers and senior military figures have been warned that almost half the UK’s gas imports, and 84 per cent of its LNG imports, use the waterway. Lord West, former head of the Royal Navy and security adviser to Gordon Brown when the latter was prime minister, told the FT that, if the strait were blockaded, the sharp fall in the UK’s gas supplies would be the country’s single most critical issue. Furthermore, Iran’s upcoming presidential elections are adding to Tehran’s need to posture, said Christopher Parry, the MoD’s former director-general of development, concepts and doctrine.
Kinder Morgan has made a bold bet on the future of US natural gas by making a $38bn deal for El Paso, the pipeline operator, Reuters reports. The takeover includes El Paso’s debt alongside a $21bn cash and stock deal, and values El Paso at a 37 per cent premium to Friday’s closing price. Kinder Morgan said it plans to sell El Paso’s exploration assets, instead prizing the company’s 43,000 miles of interstate gas pipelines, the FT reports. Added to Kinder Morgan’s assets, the network will be able to reach every major natural gas production area in the US and create the country’s fourth-largest energy company, the WSJ says.
One of the United States’ largest natural-gas pipeline operators is buying a rival for $21.1bn in cash and stock, the WSJ says, making a big bet on the future of shale gas. Pipeline giant Kinder Morgan says that by buying rival El Paso it will become the largest operator of natural-gas pipelines in the country, and the fourth-largest energy company in the US. The combined company would own about 80,000 miles of pipe stretching from coast to coast. It was not immediately clear how regulators would view the deal, which Reuters says could demand higher transport fees from oil and gas producers, which could then raise the prices that power companies and other end users pay for gas.
Eon, Germany’s largest utility, has recruited Goldman Sachs to run a sale of its gas distribution network in a move that could raise up to €2.5bn to help pay down its debts and further shift its focus away from Europe, the FT reports, citing people familiar with the situation. After a recent beauty parade of bankers, the US investment bank has been chosen to find buyers for Open Grid Europe, which operates a 12,000km pipeline network in Germany and is a subsidary of Eon’s gas supply unit Ruhrgas, Germany’s biggest gas importer. The unit could be valued at €2bn to €2.5bn and a sale is likely to take until the first or second quarter of 2012 to complete, the people said.
Despite the prospects of entering a golden age for natural gas, investors are looking decidedly less excited about LNG.
Australia is set to take over Qatar as the biggest exporter of LNG within the next decade or so. Read more
PetroChina and Calgary-based Encana have abandoned plans for a joint venture to develop a large shale gas deposit in western Canada, marking the latest in a series of retreats by Chinese companies from proposed natural resource deals overseas, reports the FT. PetroChina’s investment, set at $5.4bn when the deal was unveiled in February, would have been China’s biggest investment in Canada’s energy sector. It would also have been its largest in shale gas, which is difficult to extract and for which Chinese companies want to master the technology. DealBook cites CIBC analysts saying that while Encana’s balance sheet was “reasonable,” the company was less likely to pursue a large buyback without PetroChina’s cash.
The Wall Street Journal reports that the natural-gas industry is bowing to pressure to disclose more information about the chemicals it uses in the controversial process of hydraulic fracturing. Texas Governor Rick Perry has signed into law a bill that will require companies to make public the chemicals used in the process. While a handful of other states have passed similar measures, the WSJ says Texas’s law is significant because oil and gas drilling is a key industry in the state and the industry vocally supported the measure. Until recently, much of the industry opposed providing detailed information about its chemicals on proprietary grounds. Hyrdaulic fracturing, also known as “fracking”, involves blasting millions of gallons of water, sand and other chemicals into the ground to extract oil and gas from the bedrock.
The natgas mystery continues!
Let’s start first with the following flashes from the CME via Reuters on Friday: Read more
Energy traders remain puzzled by a fleeting plunge in natural gas futures late in Wednesday’s trading, the FT says. While some have blamed a ‘fat finger’ trade for the July natural gas contract’s sudden 8.1. per cent drop — which resolved in seconds — the evidence is growing for an algorithm glitch triggered by low volume. Having revealed the role of algorithms in the May 6 2010 Flash Crash, data specialist Nanex believes the natural gas market was taken over by algorithms ‘running backwards’ and causing bid prices to spiral, FT Alphaville reports.
The folks at Nanex — the group which successfully data-mined the consolidated trade tape from the May 6, 2010 to determine the role played by algorithmic trading in the flash crash — have cast their eyes over to the natural gas futures market and Wednesday’s mini flash crash.
In their opinion, “a close-up” of the trading patterns on the day shows “something very wrong” in the market. Read more
It’s not an earthquake. It’s last night’s mini-crash in natgas futures, via Zero Hedge:
General Electric is making “a big bet on gas” in an attempt to benefit from the increased use of the fuel for power generation, in part as a back-up to variable renewable energies such as wind and solar power, the FT reports. John Krenicki, the vice-chairman of GE in charge of its energy business, said the group was “looking at a 25-year, very bullish market” for gas, and making acquisitions and investing in new products to profit from it. The rise of gas for power generation is being driven by cheap supplies becoming available in the US, and perhaps eventually elsewhere, as well as by its lower carbon dioxide emissions when burnt than coal and its good fit with renewable energy. Mr Krenicki said: “We are betting on gas in a big way, investing ahead of the curve.
Olivier Jakob of Petromatrix observes an interesting point on Thursday regarding one of our favourite whacko ETFs, the United States Natural Gas Fund, or UNG for short.
Readers might recall how the ETF was forced to load up on natural gas swaps last year, after coming close to breaching CFTC position limits in natural gas futures. Read more
Here’s a nice piece of research from Barclays Capital.
The UK bank has enlisted the help of a former nuclear safety employee to discuss events at Fukushima Daiichi, the Japanese nuclear plant hovering on the edge of meltdown. For what it’s worth, BarCap’s energy team doesn’t think there was an operator error at the plant — the force of the earthquake combined with the effect of the tsunami “simply exceeded what the plant was designed to withstand.” Read more