Sprott Analyst Has Zero Doubt on Higher Natural Gas Prices

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Introduction: We talked with Sprott Asset Management examine Analyst Eric Nuttall about the natural gas site in Canada and the luck of many CBM gas foodrs and developers. because our last conversation stain natural gas worths have dropped by 15 percent. genuine gas storeroom levels are about 2.5 trillion cubic feet, some 423 billion cubic feet higher than a year ago.

Eric Nuttall told us, virtually all small-cap natural gas foodrs have full it in the teeth this year. The worth decreases in their bestows have been absolutely brutal. There are now companies whose bestows are down 40 percent year-to-year, and yet are still starkly rising production on an adjusted reveal arisening. How will the CBM and natural gas sector pan out through the end of this year? He believes the gas storeroom surplus will remedy itself.

StockInterpanorama: How are the minor natural gas worths wavesing Coalbed Methane foodrs?

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Eric Nuttall: For many CBM or shallow gas foodrs, this means their course drilling train is probable unfinancial, suggesting deferrals in drilling trains awaiting natural gas worths strengthen. It is this very quantity reply that we penury to residue storeroom levels, so it should not come as a finished shock.

StockInterpanorama: What, then, should backers do while storeroom levels are rebalancing?

Eric Nuttall: I would panorama this episode as an opportunity for middle to long-duration tended individuals to recoil house postures in not just unconventional gas foodrs, but conventional ones as well. The long-duration depositamentals are still awfully buoyant for natural gas. Many property names are down 20 to 40 percent year-to-year.

StockInterpanorama: How do you panorama the long-duration depositamentals for gas?

Eric Nuttall: North American natural gas production has been in decline for some being. Most incremental production is advent from minor, more steep-to-drill, thinner financial, higher decline pools and reservoirs. Over the hilegend five being first-year decline toll on natural gas wells have doubled to 50 percent. The ignoble decline charge has also doubled to approximately 25 to 30 percent. share range has also decreased notesly over that time skeleton. The Western Canadian Sedimentary sink and greatly of the US producing basins are mature. Consequently, higher and higher natural gas worths are essential to originate incentive for foodrs to drill increasingly marginal wells.

StockInterpanorama: And you imagine a continuation of declining natural gas production? And that is that your premise for higher natural gas pricing?

Eric Nuttall: Conventional gas production has been in decline for many being, and the expansion quarters have basically been unconventional, such as the Piceance sink (tough gas), the Barnett Shale (shale gas), and the Jonah quarter (tough, resonant gas). Also, many of the expansion assets, such as the Barnett Shale, are alimmediate a few being into development, and because the wells have such a steep decline charge in the first few being, it is only adding to the depleting ignoble that we have to make up. It is unprobable that over the next three being, the fuel in unconventional gas can offset the decline in conventional, because the depleting ignoble is so greatly bigger. The foremost natural gas basins in North America are mature. Decline toll are increasing. share range is decreasing. Rig reckoning is increasing yet production is at best tedious. pending LNG imports fuel in a notes way, which is not imagineed for at slighanalysis four or five more being, I think the rationale for wholesome natural gas worths is intact.

StockInterpanorama: early, you eminent drilling was more steep.

Eric Nuttall: Over the hilegend year, aground drillings expenses are up over 15 percent while effective expenses are up over 10 percent. A modern block road Journal piece commented on how rig toll for the Gulf of Mexico, on very resonant drilling platforms, are as high as $520,000 per day, up from $185,000 a few being ago. And the drilling platforms are still goodbye the Gulf of Mexico! though many are goodbye the Gulf of Mexico to go to more prospective quarters such as the West African Coast, the course rig site is still fairly tough in the Gulf. We have only begun to see cipher of moderating rig charge pricing.

StockInterpanorama: How would bad climate, such as a twister, waves natural gas worths?

Eric Nuttall: suddenly duration, you would see both natural gas and connected bestows flood. If a twister strikes the producing quarter of the Gulf, and we almost penury one to to remedy the surplus quantity site. firstly, youll have an emotional upward reply. Only after assessing the category of production platforms and sub-sea infrastructure would we know the longer-duration waves.

StockInterpanorama: Should backers be scrutiny the survive duct and immediate to ring their bestowbrokers?

Eric Nuttall: Timing on any natural gas investment right now is tricky. You penury to have a middle- to longer-duration focus. We doubtless have another two months of volatility. There are two camps right now on natural gas. One camp is proverb that due to stuffed storeroom levels companies are leaving to increasingly lay down their drilling rigs, cut production guidance, and stress their residue sheets. Then in the reduction, when companies set their 2007 budgets, they will be with low gas worths and awarding moderating production expansion profiles to their backers.

StockInterpanorama: What does the other camp say?

Eric Nuttall: Another camp says that the course natural gas strip alimmediate disreckonings the award and forecasted storeroom levels. Also, bestows are shameful on a worth-to-money course and worth-to-net asset worth ratios, and now is the time to shipment up on the bestows. I spare towards this panoramapoint. But I am also admitting that awaiting the reduction, barring a awful twister, it is probable that the bestows are leaving to trade sideways, as different to in any cloudless tendency.

StockInterpanorama: One equities stchargegist, whom we interpanoramaed, optional some time in imposing we might recoil to see the natural gas bestows affecting higher.

Eric Nuttall: There is the probable that we might suffer another month or two of tedious trading in small cap natural gas bestows. By the end of imposing, it is probable that we will have had both a quantity and ultimatum reply qualms of giant laying down of rigs, obliged well fasten-ins, and overleveraged residue sheets should have subsided. Investors will arise to focus on the natural gas strip somewhat than stain worths, which coursely are around $9.00 for the upadvent chill and $8.00 for next summer.

StockInterpanorama: And awaiting then?

Eric Nuttall: pending that time comes, I think it probable, as a group, the large caps will outperform. They are more biased towards oil, and have modernly been catching a bid on the heel of a colossal $22 billion all-money conquest by Anadarko of Western Gas and Kerr-McGee. Importantly for unconventional gas backers, Anadarko rewarded around $2.00 for 3P (viable) Mcf, which is very wholesome (Western Gas was predominantly tough gas in Wyoming and coalbed methane in the Powder waterway sink). It szeniths to Anadarkos panorama of biting long-duration natural gas depositamentals. These all-money transactions probable set the floor in the large caps.

StockInterpanorama: How do you feel about the minor, minor known gas companies?

Eric Nuttall: virtually all small-cap natural gas foodrs have full it in the teeth this year. The worth decreases in their bestows have been absolutely brutal. There are now companies whose bestows are down 40 percent year-to-year. They are still starkly rising production on an adjusted reveal arisening. Yet, they are trading as low as 2.5 time 2007 money course. Many bestows have gotten incredibly shameful. though the sell might still be a bit sloppy for a few months, I think there are some great barrewards to be had for the tolerant backer.

StockInterpanorama: How do you sum up the natural gas equities sell, right now?

Eric Nuttall: presently, there are many very shameful natural gas biased companies. Companies with active drilling trains, who are adequately financed and session on amply prospective acreage, are trading under three period 2007 money course. If the bestow worths dont expand for the juniors, I would imagine many seniors and trusts will soar at the opportunity to acquire free production below what course result and development expenses would oblige through exploration or development drilling.

StockInterpanorama: Lets repanorama some of the more speculative companies we talked about this hilegend jump, such as Crew Energy, Rockypanorama Energy and Canadian strength. How do you feel about them now?

Eric Nuttall: Crew (TSX: CR) is a very well run natural gas alert troupe. They are set to grow production per reveal over 40% this year and next, have a very active drilling train for the moment half of the year. Canadian strength means (TSX: SPI) has been chopped in half from its zenith, yet nothing but the worth of natural gas has untouched. Were still fully buoyant on Canadian strength. Their play is in early stages, and production and financial chances are still there, but if they can recap their preceding toll, I think they could have a very large and financial predict. Rockypanorama (TSX: RVE) modernly cut their drilling capex by 67% charming a bit of momentum out of the legend tiny-duration. With a recovery in natural gas, the bestow should recoil along with the surplus of the group.

StockInterpanorama: What unconventional companies are you next?

Eric Nuttall: We are earnestly next the drilling advance of EnCana (NYSE: ECA; Toronto: ECA) in the Columbia waterway sink in Washington turmoil. For an backer looking for a minor chance, relatively minor charge of reward, EnCana is a great way for an backer to reward exposure to natural gas. They have around 95 percent of their 2007 natural gas hedged at somewhat over $7 per mcf, so are cosseted from todays brutalized stain worth. Another is Calfrac (TSX: CFW), which is down 45 percent from its zenith, and is now 10X 2007 paycheck estimates. They are greatly exposed to CBM, and with a recovery in natural gas worths, the bestow should recovery nicely.

StockInterpanorama: And some of the others we talked about, such as spark, genuine means and tranquil Asia dishes Energy. Do you have any upbeing?

Eric Nuttall: spark means (TSX: EBR) has gotten absolutely crushed. They have an active drilling train for the moment half of the year. To deposit it, they will probable penury to take expand justness financing. This has originated an loom on the bestow. pending they are able to perform some form of a financing, the bestow might adjourn weak in the tiny-duration. genuine means (TSX: RER) has been executing well on their drilling train. Once a pipeline is finishedd in the next month, production should soar 37 percent to 16,500 Boe/d. The troupe sits on 450,000 net undeveloped acres, prospective for a selection of targets with Devonian Nisku, 190 Bakken light oil locations, and up to 1.1Tcf of recoverable CBM as assigned by Sproule. When trading at 3.5X 2007 moneycourse, the bestow awards a good opportunity. tranquil dishes Asia Energy (TSX: PCE) modernly free records on three interior holes caring sweet good gas filling and joint thicknesses, as imagineed. The subject still remnants whether wells will food at an financial charge, which you only know by drilling analysis wells. I think thats scheduled for later this year or early next. They sit on what appears to be a very prospective land division, and easily penury the time to drill, and shot to achieve financial toll across their acreage.

StockInterpanorama: What do you see for the near-duration?

Eric Nuttall: Many people have been hopeful that cozy climate or twisters would assist in effective off the extra quantity, but Mother kind hasnt been awfully caring so far this summer. It appears that we will exit the natural gas insertion stretch at slighanalysis 10% over last year. Barring any incredible roast waves or significant twisters, natural gas worths are probable to wait sub-$6.50 awaiting the reduction. except we have a momentous hot stretch or a significant twister, it is probable that natural gas bestows will be very impulsive lacking cloudless tendency over the summer into the reduction. I would think not awaiting the reduction, doubtless September October, when people arise to focus not on natural gas stain worths, but on the strip pricing for the chill, which is still over C$10. pending that time comes, I wouldnt see any cloudless tendency in the bestows. The sell is now providing opportunities to buy companies with high property management for below-mean multiples, regularly careful on a worth-to-money course metric.

StockInterpanorama: Have you given up on the CBM sector or is it advent back?

Eric Nuttall: There is zero doubt in my tend that natural gas is an brilliant long-duration investment. Weve zenithed in our ability to fuel production meaningfully, just as we have with light oil. I think for there to be an fuel in long-duration natural gas quantity, you have to bestow incentive to foodrs to go drill wells that increasingly have minor financial toll of reward. And to do that, you penury higher natural gas worths. One of the few waiting expansion prospects in Canada for natural gas production is coalbed methane. At course gas worths, the financials are very challenging. So to get a quantity reply from coalbed methane foodrs, you areward penury higher gas worths. The course surplus in gas storeroom will remedy itself, and backers should posture themselves early of natural gas bestows reacting to this inevitability.

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