The Rapid Natural Gas Collapse

 | Jan 27, 2012 | 7:21 AM EST
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The collapse in natural gas has occurred so swiftly that one by one we are hearing about companies that are stretched (EQT (EQT), Cabot Oil and Gas (COG), Chesapeake Energy (CHK)) by budgets that were prudent just a few months ago. We are hearing about a success story that has turned incredibly negative and the victims are turning up everywhere.

It's roiling everything from Heckmann (HEK), which transports fracking water, to Halliburton (HAL), which has tremendous drilling technology.

But nowhere did you see it more than in Carbo Ceramics (CRR), a stock that shed 20% Thursday after it has an astounding 70% decline in its proppant business (a man-made material that gets put into the well to keep the fractures open and helps for efficient production) in the Haynesville shale, a key natural gas shale field.

I thought it was a typo when I first saw it. Seventy percent! Then I figured it was year over year. But, again, it was linked quarter.

That's astounding and I don't think the stock's done going down  because a 70% decline means pretty much that the drilling is OVER.

This decline will have implications for everything from the rails, which send a lot of sand along their lines, which is a poor man's proppant, to the trucks that deliver water to do the fracking. It will mean that if you own Cabot or Chesapeake or Range (RRC) you are depending on the kindness of strangers, meaning you need a takeover bid from a foreign company willing to bet that there can be an efficient arbitrage between our natural gas at $2.50 and the world's at $16.50. Or you are betting on a cold wave and a lot of shut-in gas that could change the pricing, and I wouldn't bet on that because the surfeit of the stuff is just too great. Or, hope of hopes, you think that the president is going to get behind the stalled natural gas act which would make it a no-brainer to buy Westport Innovations (WPRT) LNG truck engines for the same price as regular diesel burning truck engines and then the savings of between $10,000 and $20,000 per truck from the switch from diesel to nat gas happens much more quickly than even I think it could. The ground will NOT be made up by utilities because they can't shift their baseload fuel from coal to nat gas as easily as Wall Street seems to think it can.

I mention all of this because Transocean's (RIG) flying on the big win against BP yesterday and ENSCO (ESV) and Schlumberger (SLB) have been one way up since they reported as they are players on the nascent post-Macondo trend to drill more off shore. Remember Schlumberger said that we are now drilling more post-Macondo than we were pre-Macondo with accelerating budgets from the Mexicans, Brazillians and the Middle East.

So you are seeing this incredible bifurcation between everything nat gas reliant from oil service to nat gas companies to the purer oil plays, like Continental Resources (CLR), EOG (EOG), Occidental Petroleum (OXY) and, of course, SLB, ENSCO and RIG.

I think this trend is so new that it isn't even in the numbers yet. That's just a matter of time. Simply understand that there will be more Carbo Ceramics-like numbers ahead for the big nat gas related plays and unless you see a shift in price for the fuel these trends will be reinforced and not easy to reverse.

Random musings: Georgia Gulf (GGC) and now Solutia (SOA)? The takeovers are happening quickly and only Frank Mitsch from Wells Fargo's been calling 'em.


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