'$10/MMBtu Gas -- Forever?' S&P Explores Hurricane Implications
Historic high energy prices have Standard & Poor's Ratings Services raising different issues for the natural gas and coal sectors, according to previews Thursday of special "CreditWeek" reports scheduled to be released next week. For natural gas, the over-concentration of critical infrastructure in the Gulf of Mexico region has been exposed; and for coal, financial and business-risk vulnerability are surfacing despite an 18-month steady run-up in prices, S&P said.
U. S. natural gas operations need more "geographic supply diversity" (read: East and West Coast liquefied natural gas terminals) in the midst of sky-high wholesale prices accelerated in the wake of the double-whammy of Gulf storms. The observation was part of S&P's report called "Katrina and Rita Pressure Natural Gas Model: U. S. Infrastructure Vulnerability Exposed." It also presents the idea of $10/MMBtu natural gas prices becoming the "norm" for years to come.
In regard to the coal industry, which intuitively should be benefiting greatly from the gas infrastructure setbacks, S&P finds exposure of financial weaknesses even in the midst ever-higher prices, and those exposures have left the majority of the major coal operators with "stable" -- instead of "positive" -- credit outlooks, S&P said in another separate energy price report, "Why High Prices Are Not Energizing Outlooks on U. S. Coal Producers."
For gas, if price spikes such as have been experienced in recent weeks become the norm, major industrial users of natural gas could be among the casualties in the form of "deteriorating credit profiles," said Peter Rigby, one of S&P's senior Wall Street-based energy credit analysts. He cited as particularly vulnerable the large, gas-consuming companies in the chemicals, plastics, packaging, and steel industries, along with gas and electric utilities. The threat of hurricanes in the primary U.S. producing area continues, and "absent greater geographic supply diversity, sharp price spikes and periods of sustained high gas prices could be with us for some time," Rigby said.
Another New York City-based S&P analyst, Dominick D'Ascoli said it is no surprise that coal prices, too, are vaulting higher. "Add the strong demand from Asia and low electric utility inventories, and one can see that these are good times for the U. S. coal producers."
But despite these favorable conditions, S&P's outlook for most U. S. coal producers is "stable," rather than positive, D'Ascoli said. "The flat outlook is not correlated to one overriding theme but rather relates to a combination of company-specific issues, uncontrollable industry characteristics, and regional factors."
For natural gas, S&P's Katrina/Rita report said "it remains to be seen how long the latest shut-in will last, but the market seems to be anticipating a long outage -- and tight supplies for the heating season. This could mark a watershed in the natural gas market, which a decade earlier prices were $1.68[/MMBtu] in 2000 dollars."
Natural gas prices reached $15/MMBtu at Henry Hub at one point in September, and weeks later, "much of the damaged infrastructure remains offline -- a significantly lengthier delay than the 20 days of downtime caused by Hurricane Ivan in 2004." S&P characterized the U. S. natural gas situation right now as "tightly balanced with no excess capacity."
While acknowledging that energy price forecasting is difficult and often wrong, S&P said it is "difficult today to come up with a credible scenario that brings natural gas prices down to the $3 to $4/MMBtu levels of several years ago."
Therefore, with drilling costs rising and gas well productivity declining, over the longer term, "until gas supplies diversity beyond the Gulf, consumers should anticipate occasional gas price spikes into the $10 to $20/MMBtu range for extended periods," S&P concluded.
For coal, the rating agency does not think today's prices can be sustained, but nevertheless, "the good times are not over yet." About a half-dozen factors could benefit coal prices, such as oil/natural gas prices staying high, nuclear proposals taking long permitting periods, and an increase in building new coal-fired generation plants.
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