The natural gas glut in the U.S. shows no signs of slowing production

11/03/2009 12:30 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

Doesn’t anybody know that there’s a natural gas glut in the United States?

In a glut low prices are supposed to force producers to shut wells and reduce production so that demand has a chance to catch up with supply and prices can start to rise.

It just doesn’t seem to be happening that way right now, however.

 Some of the biggest natural gas producers are actually expanding production even though they can’t sell the gas they’re producing now except at a rock bottom price. The big debt loads some of these companies piled up during the boom just might have something to do with their desire to maintain revenue no matter what.

Take Chesapeake Energy (CHK) as an example. The company finished the June 2009 quarter with long-term debt of $13.6 billion. As a result of asset sales and other deals to raise cash, the company had reduced its long-term debt to just $12.1 billion by the end of the second quarter. Even that lower level of debt cost $43 million in interest payments during the quarter, however.

So you shouldn’t be too surprised to learn that Chesapeake hasn’t cut production during the current glut in natural gas supplies in the United States. In the third quarter, and despite disposing of some assets, natural gas production climbed by 7% from the third quarter of 2008. The company now anticipates production will grow by 5% to 6% in 2009, 8% to 10% in 2010, and 12% to 14% in 2011.

Natural gas closed at $5.06 per million British Thermal Units (BTUs) on October 29. That was down about 60% from the highs above $13 per million BTUs in the summer of 2008.

This isn’t especially good news for any company hoping for an end to the glut of natural gas in the United States. Oil companies around the world may be investing in natural gas because it’s cheap now and they expect prices to soar once the global economy recovers. As I wrote in my 8:30 post today, I think that’s a good bet in some areas of the world, particularly Europe.

In the U.S., though, natural gas is cheap now and looks to stay cheap for quite a while.

If I can borrow a cliché from Brazil that the South American giant no longer has any use for, natural gas in the United States is the fuel of the future and it always will be. Well, maybe not always, but at least for long enough to try investors’ patience.

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