Between May and August the price of natural gas declined by nearly 18%. Despite the recent fall, the price of natural gas is still higher than it was last year. Looking forward, investors need to ask, will natural gas make a comeback? And how will the developments in this market affect natural gas companies such as Chesapeake Energy (NYSE:CHK)?
Supply and demand of natural gas
According to the Energy Information Administration, residential and commercial consumption spiked in the past several months: During the first five months of 2013, the demand in the residential and commercial sectors jumped 21.4%.
Conversely, consumption in the power sector declined by 15.2% compared to the same time frame last year. The rise in demand for coal may have contributed to the drop in natural gas consumption in the power sector.
In total, up to May 2013, the demand for natural gas rose by 3.6% (year-over-year). Thus, the higher demand for natural gas in the residential and commercial sectors keeps the total demand strong this year.
From the supply side, natural gas production continues to fall. Moreover, the number of natural gas rigs fell slightly to 380 by the end of last week. The current number of rigs is 20% lower than last year's rig count.
Based on the above, the recovery in the demand for natural gas and the drop in production could eventually result in a rise in the price of natural gas in the near future.
The potential rise in natural gas prices and demand could pull up the revenue and profit margins of Chesapeake in coming quarters. In the second quarter, the company's realized natural gas price jumped by 39%. But this wasn't the only contributing factor for higher revenue. The company has been shifting its operations from natural gas to oil. In the second quarter, Chesapeake's oil production spiked by 44% and accounted for 17% of its total production. In 2012, oil production was only 13% of total production.
Conversely, natural gas production is projected to fall by 3% to 5% in 2013. This means, the company's natural gas production will account for only 75% of its total -- back in 2012 it was 80%.
Anadarko Petroleum (NYSE:APC), unlike Chesapeake, increased its natural gas production by 4% in the second quarter while oil production slipped by 6%. The company benefited from the 80% spike (year-over-year) in the price of natural gas. This was the main driving force behind the company's rise in revenues during the second quarter. Considering the low price in 2012, and the potential rise in natural gas prices in the near future, the company is likely to keep increasing its sales in natural gas in the following quarters. Nonetheless, Anadarko expects to increase its oil production by 10% in 2013 and its natural gas production by only 4%. Moreover, once exploration projects, such as the Lucius development in the deepwater Gulf of Mexico, start producing oil (current estimate at the second half of 2014) the natural gas segment will have a smaller effect on Anadarko's total revenue.