A Hot Quarter for Energy

Q1 saw many big developments, especially in oil, and Q2 will, too

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No Lack of Natural Gas

While oil keeps rising, natural gas keeps plunging. The boom in unconventional drilling and hydraulic fracturing has unearthed a record amount of the fuel. So much, that natural gas inventories are currently more than 50% above the five-year averages for this time of year.

Prices have hit a 10-year low of $2.18 per 1,000 cubic feet. That low price makes a variety of dry-gas wells unprofitable for E&P firms. To that end, producers like Chesapeake (NYSE:CHK) and Canada’s EnCana (NYSE:ECA) have been reducing production and shifting toward more profitable natural gas liquids (NGLs). Prices for these fuels generally track the U.S. benchmark West Texas Intermediate crude standard and generally sell for about 50% of the price of a barrel of oil.

Despite production cutbacks and moves to NGL-rich fields like the Mississippi Lime, analysts expect that record amounts of natural gas in storage may not be absorbed by summertime. That’ll keep prices low for some time.

Budget-Busting Explorers

The first quarter was also marked by a series of historically large capital spending budgets by the major producers. Starting with Chevron (NYSE:CVX) and its $33 billion capital plan, the recent spending projections highlight the sheer dollar amounts needed to produce hydrocarbons these days. As demand grows and traditional sources of supply dwindle, the capital requirements needed to tap unconventional assets will undoubtedly continue to rise.

Exxon Mobil’s (NYSE: XOM) five-year $185 billion budget is a testament to these rising costs. Ultimately, higher capital spending amounts will become even more prevalent and necessary in the future.

Finally, the first quarter also marked a turning point for beleaguered BP (NYSE:BP). The company released better-than-expected earnings, and it reached a settlement with some of the victims of its Deepwater Horizon disaster. While the British energy major still has plenty of legal woes to deal with, these major milestones could be a step in the right direction.

Another Doozy Is in Store

So, after an interesting first three months to the year, investors should be ready for more of the same. While nothing is for sure, oil prices should continue to remain high on both Mideast tensions as well as a strengthening global demand. That’ll be bullish for E&P sector, though not so much for the refiners that don’t have access to cheaper WTI crude readily available in the U.S. Midwest.

For investors, focusing on the producers with strong capex budgets will be key to long-term success. Likewise, those producers that focus more on NGL and shale oil will get the nod as natural gas inventories remain high. Overall, the second quarter should another doozy for energy investors. At least, there’s plenty to like about the sector.

As of this writing Aaron Levitt doesn’t own any the stocks mentioned here.


Article printed from InvestorPlace Media, http://investorplace.com/2012/03/a-hot-quarter-for-energy/.

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