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Efficiency kills the natural gas industry

Today's Financial News - Posted October 16, 2009

iStock_000000720164XSmallThe better we get at finding and pumping natural gas, the cheaper the abundant fuel source will get. It is good news for our heating budgets, bad news for companies like U.S. Energy Corp. (NASDAQ:USEG).

By Andrew Snyder, TodaysFinancialNews.com

Baltimore – (TFN): It is time, time to make our move. Thanks to a wicked, early-fall weather system creating unseasonably low temperatures in the nation’s Northeast corner, natural gas prices are on the rise.

I can understand the increased prices. It is fundamental. The earlier we turn flip the switch on our furnaces, the more natural gas we are going to burn. It makes sense.

But a three-day dip in the jet stream is nowhere near powerful enough to overcome the gale that is about to strike the natural gas market when the nation suddenly finds itself with too much of the easy-to-find energy source.

Even though prices are significantly lower than they were 12 or 24 months ago, the amount of gas coming from the ground is as high as ever. And even though drill-rig counts are way down, production is on the rise.

We are better and more efficient than ever at finding and pumping natural gas. Our growing expertise is going to kill the industry.

Just look at a few of the market’s top gainers today.

The calm before the storm

U.S. Energy Corp (NASDAQ:USEG) shareholders are sitting on intraday gains of more than 30% thanks to news of the company’s recent successful drilling.

To say the least, U.S. Energy has been keeping the drills turning. Just today, the company announced its latest well tested with natural gas flows of 1.84 million cubic feet per day.

The drill bit reached a depth of 19,426 feet, a figure unheard of just a few years ago.

Of course, this is not the only new well the company is working on. Thanks to an agreement with Brigham Exploration Company (NASDAQ:BEXP), U.S. Energy will drill a total of six wells by the end of this year, with four reaching completion.

If they can just figure out where to sell all of that gas.

It is a similar story for Royale Energy (NASDAQ:ROYL) shareholders today. Their stock is up by double-digit proportions on the news that the company’s latest discovery “provides Royale Energy with significant new development opportunities to increase its production and natural gas reserves.”

That means there is even more natural gas ready to flood an already overcrowded market.

One of the most intriguing aspects of the company’s report is it only began drilling on September 23.

It took less than a month to set the pipe and start pumping gas. That’s fast, but there are companies drilling even faster.
Efficiency hurts

The better they get at finding, drilling and pumping natural gas, the cheaper the fuel source will become. We already have too much of the stuff, yet the industry keeps drilling and getting more efficient.

Pretty soon, we will have TV infomercials selling do-it-yourself well-drilling kits.

I can hear the slogan now. “Buy now, pump tomorrow. It really is that simple.”

Over at TFN Strategic Trader, my weekly options recommendation focused keenly on this situation. We made a play against a small company that is likely to see its revenue stream shattered as more and more natural gas floods the market.

This week’s jump in energy prices created a perfect opportunity to jump in and ride the wave down.

The crash is going to happen and it is going to happen fast. Make your move now.


Next Article: TFN eNews 10/16/2009: Can you settle our argument?

Posted by Andrew Snyder · Filed Under Featuring..., Oil and Energy 

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