Natural Gas prices hit 10-year prompt month lows of $2.30/mmbtu this week and there doesn’t look to be anything coming in the next several months that should change the current outlook.
Oil & gas companies with significant exposure to natural gas prices have been lowering capital budgets for 2012 and shifting dollars from dry-gas targets to oil and liquids-rich plays. That will only magnify at $2 natural gas prices. Many companies made corporate acquisitions, leased acreage, and drilled billions of dollars in wells that need much more than $2 natural gas to pay back. The one saving grace for the industry is that there is significant opportunity in oil plays like the Eagle Ford Shale, Bakken Shale, and in West Texas. If operators shift enough activity to oil, we should begin to see a significant shift in supply over the rest of the year, but we’ll be fighting an up hill battle with mild weather leading to record storage levels coming out of this winter.
The opportunity for companies to explore for oil doesn’t mean much for the individual mineral owner and our checks will suffer this year if you’re in a dry-gas area like the Barnett, Fayetteville, Haynesville, or Marcellus shales. Add typical declines of 60-90% in production during the first year of a wells life in those plays and you might be surprised by how much less your checks are this year. For mineral owners in parts of the Haynesville where signing bonuses of $10,000 plus were paid, it is quite possible they received the bulk of today’s value of their minerals in their signing bonus. That’s varies widely from the historical norm and likely means prices will have to get better.
Natural Gas prices have been on a steady decline since hitting $13/mmbtu in 2008 and had fallen to almost $3 at the end of 2011. The current 12-month strip, that’s what the futures market is telling us prices will be, is a paltry $2.82/mmbtu. That’s a 35% drop in prices from last year. Combine the price drop with typical declines and you should prepare for gas royalty statements that are half of what you made last year.