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Dante Keilani's avatar
$79.3m follower assets
Unlocked Follower Assets
Want to shoutout @oilman69 — had a conversation with him in September of last year and after that conversation I bought Antero Resources $AR and Viper Energy Partners $VNOM.

Has been a great call so far.

Follower Assets unlocked, beating the S&P 500 by almost 30% even though I'm down 47% on $PLTR and 86% on $FUBO.
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Dante Keilani's avatar
$79.3m follower assets
Will Natural Gas Prices Keep Going Higher?
This memo is an attempt to answer a question I just asked on Sam Stribling's Bull Thesis on Tellurian. $TELL

@strib pointed out that natural gas prices are rising and could be the highest in 13 years this winter.

I think that is reasonable- but my question is: Will natural gas prices be able to keep going higher beyond that?

Argument in favor
Yes, natural gas is now the country's primary electricity fuel, displacing coal throughout most of the country. And yes, we now use natural gas components to replace oil throughout our petrochemical systems— we use the stuff to make everything from lipstick to diapers to safety glass to insulation to pesticides... etc.

Higher demand means higher prices, right?

For a bit, which is what we're seeing right now. But sustained rising natural gas prices? My bet is no.

Arguments against
In an environment where $5 natural gas is the norm, it makes economic sense to drill for natural gas just for the gas. (Usually drilling is done specifically for the oil and not natural gas. The natural gas is either wasted or reluctantly collected, but most of the time it isn't economical to be the main reason for drilling.)

Shale tech has gotten a lot better in the last 8-10 years, and there will likely be explosive growth in on-shore production of natural gas.

Unlike off-shore wells that take years to bring on-line, and can get shut down in an instant by hurricanes like Ida, _on-_shore shale wells reach full output in a mere six weeks.

Prices won't rise because supply will be able to expand quickly to meet demand.

Every bit of oil & gas production that moves on-shore is more sustainable, lower cost, cleaner, and lower risk than anything that is international or offshore.

How this affects Tellurian?— not sure, I'm just starting to look into them. They operate a low-cost, global natural gas business that delivers natural gas to customers worldwide. They have a portfolio of natural gas production of nearly 100 drill-able locations with an estimated one trillion cubic feet of net resource.

Maybe they would benefit from the on-shoring of natural gas production. Looking into it more. Any thoughts from @oilman69 @strib or others would be much appreciated.
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I definitely think the shale industry's historical lack of capital discipline whenever prices rise is a big reason why the sector is incredibly cheap at current equity levels and futures pricing... market doesn't believe prices will stay here bc they think drill baby drill is coming back, following two years of discipline.

Counter-arguments to this... 1) front-month prices are $5, but the futures curve is heavily backwardated ... <$3 when you get out to 2024+ ... well economics are largely based on the long-term price outlook, which influences the decision to grow rather than hold production levels flat; 2) investors want the industry to stay disciplined, focusing on free cash flow and shareholder returns, rather than growth; 3) a lot of natural gas producers have hedged a substantial amount of their future production at prices WELL below currently levels... this limits the cash flow upside from current high prices that would have allowed them to deploy more capital to grow; 4) the largest natural gas basin (Marcellus/Utica up in Appalachia) has takeaway constraints... not enough pipeline capacity to support growth that would get gas to high priced markets... incremental volume instead is "trapped" in the Northeast where prices are lower; 5) domestic demand should continue to grow... new LNG export capacity (new capacity at Corpus, Sabine Pass, Calcasieu Pass over next year or so), new power demand as coal/nuclear plants are closed, increased exports to Mexico, etc... so the market can absorb some level of production growth anyway; 6) core exhaustion ... the cores of the major natural gas basins are known and finite... the best inventory is held in the hands of a small number of producers... over the next couple years, a lot of producers will run out of the good stuff they are drilling now, forcing them to drill lower quality wells, driving the average breakeven producer price in the US higher over time.

I'll refer to my post you mentioned above about where I think prices go near term... warm winter probably $3-3.50 ... cold winter $15+ (honestly who knows, it could be epic)... longer-term, I'd agree that $5 is likely not sustainable... like if the 10-year strip moved to $5, that probably wouldn't last long... even the most disciplined producers would probably hedge $5 and then grow some... but I do think the <$3 long-term strip is undervalued... and that many natural gas equities are undervalued... they don't need $5 ... $3 works great. The $4 futures curve for 2022 is awesome.
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