Sprott Analyst Has Zero Doubt on Higher Natural Gas Prices

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Introduction: We talked with Sprott Asset Management study Analyst Eric Nuttall about the natural gas site in Canada and the luck of many CBM gas constructrs and developers. while our last conversation perceive natural gas assesss have dropped by 15 percent. inborn 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 constructrs have full it in the teeth this year. The assess decreases in their reserves have been absolutely brutal. There are now companies whose reserves are down 40 percent year-to-time, and yet are still spicily emergent production on an adjusted portion footing. How will the CBM and natural gas sector pan out through the end of this year? He believes the gas storeroom surplus will truthful itself.

StockInterstance: How are the drop natural gas assesss banging Coalbed Methane constructrs?

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Eric Nuttall: For many CBM or shallow gas constructrs, this means their represent drilling instruct is prone unfinancial, suggesting deferrals in drilling instructs awaiting natural gas assesss strengthen. It is this very give reply that we basic to relax storeroom levels, so it should not come as a great astonish.

StockInterstance: What, then, should depositors do while storeroom levels are rebalancing?

Eric Nuttall: I would stance this time as an opportunity for middling to long-label brainsed individuals to surprise structure statuss in not just unconventional gas constructrs, but conventional ones as well. The long-label financeamentals are still awfully cheerful for natural gas. Many trait names are down 20 to 40 percent year-to-time.

StockInterstance: How do you stance the long-label financeamentals for gas?

Eric Nuttall: North American natural gas production has been in decline for numerous time. Most incremental production is launch from slighter, more classy-to-drill, thinner financial, higher decline pools and reservoirs. Over the older five time first-year decline charge on natural gas wells have doubled to 50 percent. The basis decline cost has also doubled to approximately 25 to 30 percent. team bulk has also decreased matterly over that time border. The Western Canadian Sedimentary washbasin and greatly of the US producing basins are mature. Consequently, higher and higher natural gas assesss are mandatory to invent incentive for constructrs to drill increasingly marginal wells.

StockInterstance: And you guess 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 time, and the cyst regions have basically been unconventional, such as the Piceance washbasin (stalwart gas), the Barnett Shale (shale gas), and the Jonah replace (stalwart, extreme gas). Also, many of the cyst assets, such as the Barnett Shale, are alprompt a few time into development, and because the wells have such a steep decline cost in the first few time, it is only adding to the depleting basis that we have to make up. It is unprone that over the next three time, the enlarge in unconventional gas can offset the decline in conventional, because the depleting basis is so greatly superior. The foremost natural gas basins in North America are mature. Decline charge are increasing. team bulk is decreasing. Rig hold is increasing yet production is at best level. awaiting LNG imports enlarge in a matter way, which is not guessed for at slighcheck four or five more time, I think the casing for well natural gas assesss is intact.

StockInterstance: before, you renowned drilling was more classy.

Eric Nuttall: Over the older year, aground drillings overheads are up over 15 percent while effective overheads are up over 10 percent. A modern fence road Journal paragraph commented on how rig charge for the Gulf of Mexico, on very extreme drilling platforms, are as high as $520,000 per day, up from $185,000 a few time ago. And the drilling platforms are still parting the Gulf of Mexico! while many are parting the Gulf of Mexico to go to more prospective regions such as the West African Coast, the represent rig site is still fairly stalwart in the Gulf. We have only begun to see cipher of moderating rig cost pricing.

StockInterstance: How would bad survive, such as a tempest, bang natural gas assesss?

Eric Nuttall: concise label, you would see both natural gas and allied reserves gush. If a tempest strikes the producing region of the Gulf, and we almost basic one to to truthful the surplus give site. firstly, youll have an emotional upward reply. Only after assessing the repute of production platforms and sub-sea infrastructure would we know the longer-label bang.

StockInterstance: Should depositors be scrutiny the survive focus and prompt to call their reservebrokers?

Eric Nuttall: Timing on any natural gas investment right now is tricky. You basic to have a middling- to longer-label focus. We perhaps have another two months of volatility. There are two camps right now on natural gas. One camp is adage that due to swollen storeroom levels companies are leaving to increasingly lay down their drilling rigs, cut production guidance, and stress their relax sheets. Then in the accident, when companies set their 2007 budgets, they will be with low gas assesss and representing moderating production cyst profiles to their depositors.

StockInterstance: What does the other camp say?

Eric Nuttall: Another camp says that the represent natural gas strip alprompt disholds the represent and forecasted storeroom levels. Also, reserves are mean on a assess-to-coins surge and assess-to-net asset esteem ratios, and now is the time to charge up on the reserves. I trim towards this stancepoint. But I am also admitting that awaiting the accident, barring a cruel tempest, it is prone that the reserves are leaving to trade sideways, as divergent to in any earn track.

StockInterstance: One equities stcostgist, whom we interstanceed, optional some time in eminent we might surprise to see the natural gas reserves touching higher.

Eric Nuttall: There is the budding that we might continue another month or two of level trading in small cap natural gas reserves. By the end of eminent, it is prone that we will have had both a give and plea reply qualms of vast laying down of rigs, strained well fasten-ins, and overleveraged relax sheets should have subsided. Investors will launch to focus on the natural gas strip instead than perceive assesss, which represently are around $9.00 for the uplaunch chill and $8.00 for next summer.

StockInterstance: And awaiting then?

Eric Nuttall: awaiting that time comes, I think it prone, as a group, the large caps will outperform. They are more slanted towards oil, and have modernly been catching a bid on the heel of a enormous $22 billion all-coins capture by Anadarko of Western Gas and Kerr-McGee. Importantly for unconventional gas depositors, Anadarko rewarded around $2.00 for 3P (promising) Mcf, which is very well (Western Gas was predominantly stalwart gas in Wyoming and coalbed methane in the Powder stream washbasin). It suttermosts to Anadarkos stance of stalwart long-label natural gas financeamentals. These all-coins transactions prone set the foot in the large caps.

StockInterstance: How do you feel about the slighter, slighter known gas companies?

Eric Nuttall: virtually all small-cap natural gas constructrs have full it in the teeth this year. The assess decreases in their reserves have been absolutely brutal. There are now companies whose reserves are down 40 percent year-to-time. They are still spicily emergent production on an adjusted portion footing. Yet, they are trading as low as 2.5 time 2007 coins surge. Many reserves have gotten incredibly mean. while the sell might still be a bit sloppy for a few months, I think there are some great baradditions to be had for the enduring depositor.

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

Eric Nuttall: presently, there are many very mean natural gas slanted companies. Companies with active drilling instructs, who are adequately financed and session on vastly prospective acreage, are trading under three time 2007 coins surge. If the reserve assesss dont develop for the juniors, I would guess many seniors and trusts will leap at the opportunity to acquire unfilled production below what represent sentence and development overheads would need through exploration or development drilling.

StockInterstance: Lets relaxance some of the more speculative companies we talked about this older pounce, such as Crew Energy, Rockystance Energy and Canadian mettle. How do you feel about them now?

Eric Nuttall: Crew (TSX: CR) is a very well run natural gas alert group. They are set to grow production per portion over 40% this year and next, have a very active drilling instruct for the trice half of the year. Canadian mettle means (TSX: SPI) has been chopped in half from its uttermost, yet nothing but the assess of natural gas has misused. Were still very cheerful on Canadian mettle. Their play is in early stages, and production and financial gambles are still there, but if they can recur their before charge, I think they could have a very large and financial forecast. Rockystance (TSX: RVE) modernly cut their drilling capex by 67% pleasing a bit of momentum out of the untruth bgamble-label. With a recovery in natural gas, the reserve should replace along with the relax of the group.

StockInterstance: What unconventional companies are you next?

Eric Nuttall: We are zealously next the drilling growth of EnCana (NYSE: ECA; Toronto: ECA) in the Columbia stream washbasin in Washington stately. For an depositor looking for a drop gamble, relatively drop cost of replace, EnCana is a great way for an depositor to addition exposure to natural gas. They have around 95 percent of their 2007 natural gas hedged at somewhat over $7 per mcf, so are secluded from todays brutalized perceive assess. Another is Calfrac (TSX: CFW), which is down 45 percent from its uttermost, and is now 10X 2007 paycheck estimates. They are heftily exposed to CBM, and with a recovery in natural gas assesss, the reserve should recovery nicely.

StockInterstance: And some of the others we talked about, such as spark, honest means and soothing Asia porcelain Energy. Do you have any uptime?

Eric Nuttall: spark means (TSX: EBR) has gotten absolutely crushed. They have an active drilling instruct for the trice half of the year. To finance it, they will prone basic to obtain advance fairness financing. This has inventd an threaten on the reserve. awaiting they are able to perform some form of a financing, the reserve might delay weak in the bgamble-label. honest means (TSX: RER) has been executing well on their drilling instruct. Once a pipeline is greatd in the next month, production should leap 37 percent to 16,500 Boe/d. The group sits on 450,000 net undeveloped acres, prospective for a mixture 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 coinssurge, the reserve represents a good opportunity. soothing porcelain Asia Energy (TSX: PCE) modernly free numbers on three central holes effective appealing good gas filling and layer thicknesses, as guessed. The query still lingerder whether wells will construct at an financial cost, which you only know by drilling check wells. I think thats scheduled for later this year or early next. They sit on what appears to be a very prospective land mushroom, and cleanly basic the time to drill, and effort to achieve financial charge across their acreage.

StockInterstance: What do you see for the near-label?

Eric Nuttall: Many people have been hopeful that zealous survive or tempests would assist in effective off the surplus give, but Mother spirit hasnt been extremely effective so far this summer. It appears that we will exit the natural gas infusion spice at slighcheck 10% over last year. Barring any incredible round waves or significant tempests, natural gas assesss are prone to linger sub-$6.50 awaiting the accident. save we have a acute hot stretch or a significant tempest, it is prone that natural gas reserves will be very unstable lacking earn track over the summer into the accident. I would think not awaiting the accident, perhaps September October, when people launch to focus not on natural gas perceive assesss, but on the strip pricing for the chill, which is still over C$10. awaiting that time comes, I wouldnt see any earn track in the reserves. The sell is now providing opportunities to buy companies with high trait management for below-mode multiples, normally slow on a assess-to-coins surge metric.

StockInterstance: Have you given up on the CBM sector or is it launch back?

Eric Nuttall: There is zero doubt in my brains that natural gas is an admirable long-label investment. Weve uttermosted in our ability to enlarge production meaningfully, just as we have with light oil. I think for there to be an enlarge in long-label natural gas give, you have to grant incentive to constructrs to go drill wells that increasingly have drop financial charge of replace. And to do that, you basic higher natural gas assesss. One of the few lingering cyst prospects in Canada for natural gas production is coalbed methane. At represent gas assesss, the financials are very challenging. So to get a give reply from coalbed methane constructrs, you aaddition basic higher gas assesss. The represent surplus in gas storeroom will truthful itself, and depositors should status themselves before of natural gas reserves reacting to this inevitability.

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