If gas averages 3.5$ isntead of 2.7$, that will increase gas costs by 30% and gross margins somewhere in the 20-25% range?. It seems you get 6$ in earnings by annualizing Q2 earnings this year with average cost of 2.67$.
3.5$ gas will cut earnings by about 3-500m$. Which would make the stock less mis-priced as it seems to be now. Which would put normalized earnings estimate between ~4-6.5$. I guess on the cheap side still if you add in buybacks.
Only the low cost guys make money at 3$, but not that much. The problem is that marginal suppliers set the price. A lot of low cost players have indicated that they will not expand production much beyond where it is now if gas doesn't go to at least 4$ (especially given the levels of leverage already).
So if they don't grow, and the marginal producers who need 4$ gas, decline then that will keep prices between 3-4$ at least. With decline rates of 50-70% the first year, current amount of rigs are not sustainable to grow production (only to keep up, while conventional and older non conventional wells are declining):
http://www.eia.gov/petroleum/drilling/pdf/dpr-full.pdf
The Cheniere terminals will come online in 2016 and 2017 with 2.8bcf/d total (vs 90bcf/d in total NA demand). Which is 3% of North american demand. That is almost guaranteed, then there is another 10bcf/day potential between now and 2020 in terminals.
Add in coal plants ( gas equivalent of 3bcf/day going offline in 2015 and 4.5bcf/day going offline in 2016/17, most of it directly converted to nat gas), and the huge capacity growth in nat gas intensive industries, I don't see how gas can stay below 3$. The market is clearly saying that it needs at least 3.5-4$ in nat gas to grow net PDP resources and production. The fact that a ton of smart insiders in the gas industry are buying shares hand over fist sort of seems to confirm this.
But I suppose in the short term prices can stay low.
Just my 2 cents
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