As Gas Majors Cut Production, Gas Prices Rise From Record Lows

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ConocoPhillips

Low gas prices in the U.S. have forced ConocoPhillips (NYSE:COP) and other players like Chesapeake Energy (NYSE:CHK) to announce production cuts over the past few weeks. Lower supplies resulted in gas prices rising 17 cents to $2.55 / thousand cubic feet (tcf) after an EIA report indicated that gas inventory levels had declined more than expected in the last week. Gas prices had touched 10 year lows at $2.35 /tcf earlier, which was less than half the price levels seen in 2010 as a mild winter exacerbated the oversupply situation in the U.S.

We have a $79 price estimate for ConocoPhillips, which is at a 10% premium to its current market estimate.

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Lower production

Analysts expect that more producers will follow Chesapeake and ConocoPhillips in cutting production targets in the future. Although overall gas production in the U.S. will continue to increase over the next two years, the rate of increase will be tempered by low prices. Underground inventory levels in the U.S. saw a less than expected decrease in the winter resulting in low gas prices. Low prices are hampering the profitability of gas production in the U.S. Production in the country has increased to record levels in the past years on the back of shale exploration, which now contributes to a third of the country’s total gas supply.

Low domestic prices are also forcing players to consider exporting surplus production to Asian markets by converting gas into LNG. Over the past two months, two Asian customers have signed supply contracts with American gas producers. Gas prices in the U.S. are presently lagging international benchmarks. Benchmark crude oil prices also saw small declines in the country because of falling demand. According to government agencies, weekly demand for petroleum products dropped by 4% compared over the same period last year. Gasoline, diesel and heating oil demand also fell in the period.

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