Why $30 oil is great?

Why $30 oil is great? Well, it's not if your an oil company like PXD, CLR, LPI or OAS , but if you're a consumer it's fantastic. But I want to explore why I think $30 oil is not only great for consumers but for natural gas producers like Magnum Hunter Resources and Gulfport Energy as well.

What? How can $30 oil be good for a company that produces nat gas? It surely hasn't thus far with MHR and GPOR down 67% and 32% ytd respectively.

Here's how I see it, the recent and dramatic fall in oil prices had made pretty much every domestic producer drastically slashing 2015 cap ex. Take PXD for instance, they slashed their 2015 capital expenditure by 45% 2015 and they aren't alone, EOG is cutting 2015 capex by 40%. If you follow the space, pretty much everyone has cut their budget significantly for 2015 or soon will. I'll explore why this is significantly more bullish for nat gas producers than oil producers next but first I want to tackle the  difference in tight oil and traditional fields.

Most people at this point can tell the basic difference between an oil reservoir and tight oil reservoir or shale and possible a little less know that shale oil declines at a faster rate. But what I think most investors are missing is how much faster they deplete and if they do know they aren't yet putting the pieces together on it's significance.
The supply of the oil from an existing fields decline on an average of 5-7% per year  The latest onshore tight oil fields in North America show annual decline rates greater than 30, 40, & 50% in the first year before the rate begins to level off more like the traditional oil type curve.

Why is this so significant? Why is it more significant to natural gas producers? How could it be, aren't these mostly oil fields?

Well yes they are mostly oil, whether it be the Bakken, Eagle Ford, Permian, Niobrara, etc. these are mostly oil fields, mostly. Let's look at the Bakken for example. In general Bakken wells can be be upwards of +-90% oil. But they also produce gas and up until the last couple of years they used to flare that gas. I remember this very well because one of my home run stocks Brigham Exploration used to flare it and I remember wondering when someone was going to get some pipe up there to take advantage of what was effectively burning money. Well they did and one of them in particular was Oneoak who invested over $6 billion dollars in pipeline and processing. Examples like this coupled with all the new shale wells being tapped into pipelines has helped move gas prices to record lows (well that and the Marcellus and Utica ramping up). It has a close similarity to the Barnett shale explosions that sent prices down to record lows previously.

 I hear a lot about how we are a million a day surplus globally and could be 2 million if the Iran deal goes through (though I have some serious doubts about this).

But I very seldom hear much about the domestic nat gas surplus.

According to the EIA working gas in under ground storage was 1,467 bcf/day in March '15. A year ago it was 960 bcf/day. That's a pretty big differential, some of it has to do with weather but most of it has to do with supply. Basically we are producing too much. and I think that's about to change and here's why. Remember the depletion figure earlier, 30%, 40% 50% and remember the cap ex figures, -40%, -45%. My theory is that the street has underestimated the impact of this. They are more focused on how the shale drillers here are going to effect the global supply of oil than how it's going to effect domestic natural gas. I also think they might be underestimating demand going forward too, with manufacturing feed cost being lower domestically than pretty much anywhere and just how many companies are coming home to take advantage of it. Also let's not forget the LNG export ban being lifted and Cheniere Energy's Sabine Pass (@2 bcf/day) and future Corpus Christi project (13.5 million tonnes per annum). I think the EIA's estimate for 2016 at $3.86/mmbtu could be conservative. The long term picture may even be better with some calling for $6 gas, like T. Boone Pickens did here. I happen to agree with his thesis on associated gas as I lined out earlier.

What does all this mean? Well if you're a nat gas producer this is welcome news and I believe two of my favorites MHR and GPOR are poised to benefit in a big way. The only concerning question for me is can they hang on long enough to see it? I think GPOR is in better position and their stock has dropped accordingly (-32% ytd) to weather any long term price drops. But MHR stock has been, in my opinion, unfairly treated (- 67% ytd) in large part because of concerns over liquidity. But if they can manage '15 which I think they can because they have the assets to do a JV or sell their pipeline, which is valued at $1 billion (net close to 600 mill to MHR I believe), then they stand to gain the most.

Disclosure: (I am an individual investor, I am long MHR, I have no business relationship with any company whose stock is mentioned in this post. These opinions are my own and this is not an attempt solicit to buy or sell any stock mentioned in this blog post)