At Crunch Time For US Drillers, Warm Weather Threatens Meltdown

At Crunch Time For US Drillers, Warm Weather Threatens Meltdown
A mild North American winter could punish large drillers by curbing seasonal demand for heating of homes and businesses and hurting prices.

Reuters

Dec 21 (Reuters) - Strapped for cash, Chesapeake Energy Corp canceled its traditionally grand display of holiday lights this year, but like most oil and gas drillers it is still dreaming of a white Christmas.

A mild North American winter could punish large drillers, especially gas giants like Chesapeake, by curbing seasonal demand for heating of homes and businesses and hurting prices.

Energy companies, laden with debt and reeling from a 17-month collapse in oil prices, may now face their most critical few months of the decade-long U.S. fracking boom. So far, the weather is not going their way.

Typically by the second half of December between a third and half of the United States has snow cover. This year, it is limited mostly to sparsely populated areas of the upper Midwest and Rockies region, said AccuWeather Senior Meteorologist Dale Mohler.

For drillers, that means sharply lower returns at a crucial time.

At gas fields across the country, "instead of a mentality of growth it's now a mentality of survival," said Charles Nevle, vice president at PointLogic Energy in Houston. "And right now, it's all about the weather."

Two Texas-based drillers, Magnum Hunter Resources Corp and Cubic Energy Inc, filed for bankruptcy this week. Chesapeake, the No. 2 U.S. gas producer, is working with Evercore Advisors to restructure debt or sell assets.

On Friday, U.S. natural gas futures dropped to a 16-year low of $1.68 per million British thermal units on the New York Mercantile Exchange. Supplies for delivery through the first quarter are trading below $2 for the first time since the 1990s.

Two more months of mild weather could send natgas futures as low as $1.25, said energy analyst Kyle Cooper of IAF Advisors and Criterion Research. That would be well below what it costs drillers to pump new supplies from the ground.

No-Show Snow

Cities reliant on natgas for heating are on track for one of the balmiest Decembers ever. In the first half of the month, heating degree days -- a measure of cold weather-driven demand for heating -- were 36 percent below average in Chicago, and 42 percent off in St. Louis, according to AccuWeather. (http://tmsnrt.rs/1NBXSVt)

Last week, U.S. natural gas stocks were 16.4 percent higher than year-ago levels. Production is only slightly off from September's record highs.

After two frigid winters, this one may continue to be mild due to El Nino, said MDA Weather Services meteorologist Don Keeney. The weather phenomenon can result in temperate westerly winds across North America.

Utilities store gas in caverns so they have enough fuel for heating during the November-March period, but relatively flush stocks in spring could force drillers to cut output next year due to lack of storage space.

U.S. drillers have avoided that fate in the past. During a mild 2012 winter, they switched their focus to more lucrative oil wells instead of gas.


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Copyright 2016 Thomson Reuters. Click for Restrictions.

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