It seems that the American shale gas euphoria is currently slowing down. The actual costs of the production of shale gas seem to exceed the costs accounted for by a substantial degree.
The combination of still sharply rising U.S. production, a mild winter in the U.S., and high inventories caused the Henry Hub price to fall to its lowest level since 2002. We believe, that at the current price level, the risk/return profile is very attractive.
US natural gas (Henry Hub) since 1990
Sources: Erste Group Research, Datastream
In relation to oil, natural gas has fallen to the lowest level since 1970.
Oil/gas ratio
Sources: Erste Group Research, Datastream
It seems as if the natural gas prices are about to find a bottom. We believe that, at the current level, the sector can no longer work profitably. Numerous production and investment cuts for 2012 and beyond confirm this. For example, Chesapeake Energy announced that it would cut production by 0.5 bcf/d. If the prices were to remain at this level, the company would cut its output by a total of 1 bcf/d. In addition, CAPEX would be reduced from USD 3bn to USD 900mn. Exploration expenditure would be cut by 50%, which would represent a drastic u-turn from the aggressive expansion programme in the past years. And CHK, the second-biggest natural gas producer in the U.S., reported a decline in production of almost 10%. We expect numerous producers to follow suit, which would lead to further cutbacks and a further decline in drilling activity.