Natty’s headlock on King Coal

The most important catalyst for a return of the coal sector is a normalization of the natural gas oversupply.  Aubrey this morning on CHK’s conference call:

“Chesapeake’s projected 7% downward trend in gas production for 2013 will likely continue beyond that year (until)…gas prices rise to levels that make returns from drilling in our gas plays competitive with returns available from drilling in our liquids plays. In fact, by year-end 2013, we expect Chesapeake’s gas production rate to have declined by 430 million cubic feet per day or 14% from our peak rate of 3.4 Bcf per day in 2012. Including the production of our non-operating working interest owners and our royalty owners, the total decline in Chesapeake operated U.S. gas production is likely to be around 800 million 900 million cubic feet of gas per day. And based on the substantial gas drilling rig count declined the last week reached the 12 year low and the embedded high decline rate in the country of the existing natural gas production base, we believe it won’t be long until the EIA 914 data shows U.S. gas production on a confirmed downward trend.”

Thoughts as to why this will take longer to play out than expected:

  1. Associated gas production from booming shale oil.
  2. Canadian gas oversupply needs to be worked off too (Keith Shaefer)
  3. Productivity:  Natural gas production sets new records in May as Marcellus Shale becomes country’s most productive gas field by Mark Perry.

Don’t fret yet, coal bulls.  The cyclical upcycle may be stronger for longer:

  1. Depressed NGL’s will slow the associated gas production phenomena.  Keith Shaefer
  2. If this does not do the trick, we will have to walk away from investing in coal and natural gas:  Haynesville Play.
  3. U.S.coal production has dropped 5.5% year to date, accelerating in the second quarter.
  4. Natural gas and coal producers are capital starved and debt laden.  Small changes in price are not going to incent them.
  5. Exports, but you’ll have to wait until tomorrow for more color.

Natural Resource Partners (NRP) reported last night.  Coal production on their land was basically unchanged, with coal revenue down 12%.  That is a testament to their asset strength imo.  I also like where their ‘other’ revenue business is going.  I just wish cash flow covered the (safe) distribution.  Alpha Natural (ANR) will be reporting losses overnight and have happy talk on their conference call tomorrow morning.

Cloud Peak Energy: Strong PBR Coal Play written yours truly, JJ Butler.  Stay tuned as we try to make buck on the coal sector.