>Coal: Cheap gas has arguably been a bigger coal killer over the past decade than “ESG” or regulation. As the most directly substitutable fuel in power generation, higher natural gas prices make coal more competitive.
This is the most underrated part of the article. Coal wasn't killed by ESG, it was killed by nat gas. I'm heavily positioned into Australian coal producers for the coming year.
Hello there, any chance that you can write a follow up piece to this article? With Henry Hub prices around $2 and dropping, I think you should. I'm not trying to rub this in. We all make mistakes. When data changes, our strategies should change as well.
The temporary high in NG that we saw in 2022 in hindsight was not because of a new permanent high demand. We are constrained by LNG export capacity after all. So was it just pure speculation?
I'm reading a lot more articles now from oil producers in the Permian like PXD that say their gas/oil ratio keeps going up. If we don't have pipeline capacity, the HH price will continue to be low. But other places in the US like New England continue to have high strip prices.
Given that most hedging is done using HH, this is a big problem for producers outside of Permian like EQT or AR in Appalachia.
You missed one part of the natural gas/coal dynamic. In the past when there were a lot of power plants that can burn either gas or coal. If natural gas prices were high, those plants can switch to coal. A lot of those power plants have been phased out since natural gas has been so cheap for so long.
Now that natural gas prices are high, the power plants cannot switch to burning coal. They're stuck to continue burning natural gas and keeping demand high.
This is a great piece on LNG expansion. You mention EQT for Marcellus operations. Can you recommend a resource I can look into for explorers and gas miners in the other major basins like Permian, Haynesville etc.? Always appreciate these in-depth, knowledgable articles about energy and thanks for indulding us with your expertise.
My thinking is the momentum will just get carried and continue massively in 2023 - 2025 at least. The energy issues in EU are just too big. The only huge thing that can bring this down is massive demand destruction - probably also more psychological than real if we are talking about equity pricing and revenue / cash flow.
Permian producers will be primarily oil focused - APA, PXD, OXY, are the big independents and the majors XOM, and COP (though they have a lot of gas production as well) . For Haynesville, Comstock is the main pure play that comes - EXCO resources is another Haynesville producer but its a pink sheet stock in extreme financial stress. Chesapeake, Range (RRC) and Coterra (formerly Cabot) are other northeast producers that may be of interest.
Thanks! Appreciate the direct reply. APA was on my radar a while ago, so thanks for the confirmation bias. Also it seems Buffet had set his sights on OXY for several reasons, considering the macro environment, I was looking at it from the oil angle, and even then it looked like it could be a massive winner.
I'm not sure that I have a recent breakeven estimate by basin summary, but can speak to it from looking at a lot of gas well economics over the past decade. Despite consistent <$4 HHUB for many years, production has still grown rapidly. Some of this is Permian associated gas which is somewhat price-agnostic, but despite this, core Marcellus drillers have held on while growing production in a very depressed environment. If prices hold over $4 I would expect drilling would be attractive in most of the second tier gas basins. It is always gradient - and as prices increase, it extends the circle of what's economic in theory. In practice, it comes down to driller's capital deployment decision.
Thanks for such a quick reply. My intention wasn’t to call into question your expertise, I only wanted to educate myself more thoroughly. Your posts are always a must read for me and I really appreciate you sharing your thoughts so regularly.
Natural gas storage inventory is trending at the low end of the 5 year trend just as we are entering the winter months. Historically we produce and build inventory during the summer then deplete those reserves in the winter. We are behind the average. Check out the Weekly Natural Gas Storage report.
>Coal: Cheap gas has arguably been a bigger coal killer over the past decade than “ESG” or regulation. As the most directly substitutable fuel in power generation, higher natural gas prices make coal more competitive.
This is the most underrated part of the article. Coal wasn't killed by ESG, it was killed by nat gas. I'm heavily positioned into Australian coal producers for the coming year.
One of the best quality Substack out there!
Superb piece - thanks for the education.
Another great one
Thanks for reading!
Hello there, any chance that you can write a follow up piece to this article? With Henry Hub prices around $2 and dropping, I think you should. I'm not trying to rub this in. We all make mistakes. When data changes, our strategies should change as well.
The temporary high in NG that we saw in 2022 in hindsight was not because of a new permanent high demand. We are constrained by LNG export capacity after all. So was it just pure speculation?
I'm reading a lot more articles now from oil producers in the Permian like PXD that say their gas/oil ratio keeps going up. If we don't have pipeline capacity, the HH price will continue to be low. But other places in the US like New England continue to have high strip prices.
Given that most hedging is done using HH, this is a big problem for producers outside of Permian like EQT or AR in Appalachia.
You missed one part of the natural gas/coal dynamic. In the past when there were a lot of power plants that can burn either gas or coal. If natural gas prices were high, those plants can switch to coal. A lot of those power plants have been phased out since natural gas has been so cheap for so long.
Now that natural gas prices are high, the power plants cannot switch to burning coal. They're stuck to continue burning natural gas and keeping demand high.
Sure but its not just duel fuel power plants, its also just the merit order of coal vs. gas plants
Oil&Gas drilling and service cos should become the member of the winning team as well.
Agree, oilfield services benefit.
This is a great piece on LNG expansion. You mention EQT for Marcellus operations. Can you recommend a resource I can look into for explorers and gas miners in the other major basins like Permian, Haynesville etc.? Always appreciate these in-depth, knowledgable articles about energy and thanks for indulding us with your expertise.
My thinking is the momentum will just get carried and continue massively in 2023 - 2025 at least. The energy issues in EU are just too big. The only huge thing that can bring this down is massive demand destruction - probably also more psychological than real if we are talking about equity pricing and revenue / cash flow.
Permian producers will be primarily oil focused - APA, PXD, OXY, are the big independents and the majors XOM, and COP (though they have a lot of gas production as well) . For Haynesville, Comstock is the main pure play that comes - EXCO resources is another Haynesville producer but its a pink sheet stock in extreme financial stress. Chesapeake, Range (RRC) and Coterra (formerly Cabot) are other northeast producers that may be of interest.
Thanks! Appreciate the direct reply. APA was on my radar a while ago, so thanks for the confirmation bias. Also it seems Buffet had set his sights on OXY for several reasons, considering the macro environment, I was looking at it from the oil angle, and even then it looked like it could be a massive winner.
Whenever I see TLBS, I click. Great article once again!
Keep clicking! Thank you!
Do you have any links for footnote 8? Interested in learning more details about that dynamic.
I'm not sure that I have a recent breakeven estimate by basin summary, but can speak to it from looking at a lot of gas well economics over the past decade. Despite consistent <$4 HHUB for many years, production has still grown rapidly. Some of this is Permian associated gas which is somewhat price-agnostic, but despite this, core Marcellus drillers have held on while growing production in a very depressed environment. If prices hold over $4 I would expect drilling would be attractive in most of the second tier gas basins. It is always gradient - and as prices increase, it extends the circle of what's economic in theory. In practice, it comes down to driller's capital deployment decision.
Thanks for such a quick reply. My intention wasn’t to call into question your expertise, I only wanted to educate myself more thoroughly. Your posts are always a must read for me and I really appreciate you sharing your thoughts so regularly.
Thank you for reading!
Natural gas storage inventory is trending at the low end of the 5 year trend just as we are entering the winter months. Historically we produce and build inventory during the summer then deplete those reserves in the winter. We are behind the average. Check out the Weekly Natural Gas Storage report.
https://ir.eia.gov/ngs/ngs.html
Absolutely. I thought about including this chart in the post actually! Weather now becomes pretty important