The natural gas glut in the U.S. could send prices down further as excess production overwhelms the country’s underground storage capacity.  According to analysts, supply will continue to outpace demand despite the rig count directed at gas wells beginning to fall. Some even predict that gas prices could fall even further from their present lows of around $2.08 / Thousand cubic feet (Tcf) of gas to around $1 / Tcf for a brief period of time. The changing dynamics of the natural gas market could have an impact on the North American earnings of oilfield services provider Halliburton (NYSE:HAL) and competitors like Schlumberger (NYSE:SLB) as they are forced to realign their services.
We have a $46 price estimate for Halliburton, which is at a 40% premium to its current market price.
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Competitor Baker Hughes released a statement last week that its margins in the North American market could fall by a few percentage points in Q1 2012 over the last quarter because of logistical issues and falling utilization. A concentration of industry capacity in liquid-rich plays is also putting pressure on pricing. (See: Baker Hughes Warns That Profitability May Suffer Ahead) Also, since liquids production is almost always associated with gas, the oversupply is expected to continue in the natural gas market.
Halliburton has capitalized on the shale boom in the U.S. over the past few years to improve revenues as well as profit margins. However, the success of the industry in unlocking gas reserves has directly contributed to the present supply glut. The mild winter further exacerbated the situation, bring prices down to their lowest levels of the decade, prompting some producers to announce production cuts.
Some analysts estimate that at present levels of production and consumption, storage facilities in the U.S. could be full by October.  With production from existing wells remaining strong, companies will be forced to take steps to slow output from wells or cap some of them. While low prices have spurred demand from power plants and other users, the glut is expected to continue. The present situation could impact the overall exploration and production budget of gas producers in North America, resulting in lower than expected growth for Halliburton’s revenue drivers in the region.