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Alan Gaines (Twitter @alangaines) speaks with Live Trading News on Natural Gas CHK, EFRDF, UNG, RRC

Chesapeake Energy (NYSE:CHK), Comstock Resources (NYSE:CRK), Newfield Exploration (NYSE:NFX), Range Resources (NYSE:RRC), and Ultra Petroleum (NYSE:UPL), Sandridge Energy (NYSE:SD), Carrizo Oil & Gas (NASDAQ:CRZO), Exco Resources (NYSE:XCO), Goodrich Petroleum (NYSE:GDP), Eagle Ford Energy (OTC:EFRDF- of which I am a director). The Natural Gas Fund (NYSE:UNG),

LTN- Can you speak to the short term state of US natural gas markets?

AG- Current Energy Information Administration (EIA) data shows inventories at the beginning of spring at record highs for this time of year, totaling 2.38 trillion cubic feet (tcf), or a whopping 54% over the average of the past five years. In addition, bloated inventory stocks will certainly continue normal upward bias over the coming months. This in turn will continue to pressure natural gas prices into the commencement of the winter of 2013. Spot natural gas prices hit $2.23 mmbtu today, not seen since February of 2002. Prices have moved consistently lower during the past five weeks. I would not be surprised to see the psychological support level of $2.00 mmbtu tested. Long range weather forecasts project warmer than normal temperatures into mid April, but unfortunately not so warm as to support a price increase built on cooling demand. The massive acreage positions leased by the large independents and majors since the early 2000s continue to be drilled (in order to hold those leases), with shut ins not presently impacting short term pricing.

LTN- What does the present rig count data show?

AG- Baker Hughes stated last Friday that the number of working natural gas rigs declined by another 11 last week to 652, and in fact has fallen 228 rigs since same time last year. This is the lowest level since May 2202. As natural gas prices have continuously plummeted, the number of natural gas prone rigs has of course dropped, by an average 13 rigs per week. Amazingly, despite this drop, production has not declined meaningfully-yet. One reason is that approximately one third of US natural gas output is produced from fields that primarily produce crude oil (associated gas). These wells will certainly continue to operate, as it is very profitable to produce oil at roughly $107 per barrel.

LTN- Production of natural gas from shale has ballooned during the past decade, due to hydraulic fracking. Can we expect to see that trend continue?

AG- Yes, although recent activity seems to be shifting to those basins prone to crude oil and/or liquids, such as the Bakken and the Eagle Ford shales. Extracting natural gas from shale has become a very expensive process, requiring multi stage fracs. Well costs for a 24 stage fracs in the Eagle Ford, for example, could cost up to $9-$10 million, ruining economics for natural gas, and even straining crude oil. This cannot continue indefinitely. The marginal cost for drilling and producing natural gas in the US is generally agreed to be in the $4-$5 per mcf range. Current prices are significantly below that threshold. Recently, active natural gas drillers, such as Chesapeake Energy, have finally realized that the industry has created it own Frankenstein monster, re utilizing advanced imaging and fracking to massively increase natural gas production, and impair their own market. We have watched rigs drilling for natural gas decline precipitously, but production has not followed suit. That will in fact begin to occur in the near future.

LTN- Is the a particular rig count you are looking for in order to peak your interest in natural gas? When would you, as a successful energy investor, begin to accumulate positions in natural gas equities?

AG- Rig count is just one tool I use regarding timing. However, a sustained natural gas rig count of 550-575 would be necessary to finally bring about an attendant decrease in production. The commodity and stock markets will anticipate this prior to it actually occurring. I would expect the time to purchase select natural gas stocks would be within 3 to 6 months.

LTN- Can you give us a few names you currently have on your radar?

AG- Certainly. I would first lean towards large cap companies, and use a “trickle down” approach, looking next at mid and small caps. I utilize small and micro caps in order to achieve a disproportionate gain in my portfolio, which has worked very well for me over the years. I try and stay with well capitalized upstream companies with intelligent management, and high incremental exposure to natural gas.

The obvious bellwether natural gas stock is Chesapeake Energy (CHK), which is one of the first names I would gravitate towards-when the timing is right.

Comstock Resources (CRK), Newfield Exploration (NFX), Range Resources (RRC), and Ultra Petroleum (UPL) are but a few representative names of large cap ideas I would look at. Another interesting name is Sandridge Energy (SD), although it must be mentioned that this company does have a very leveraged balance sheet. A few noteworthy, and riskier, mid and small caps include Carrizo Oil & Gas (CRZO), Exco Resources (XCO), Goodrich Petroleum (GDP), and micro cap Eagle Ford Energy (EFRDF- of which I am a director). There are many other names I would also consider when proper timing is closer at hand. Another idea is US Natural Gas Fund (UNG), an ETF designed to track, in percentage terms, actual natural gas price movement.

Alan D. Gaines is presently Chairman of the Board of Directors and CEO of Gaines Energy Holdings, Inc., a privately held entity housing merchant banking activity (through wholly owned affiliate Proton Capital, LLC) as well as Dune Operating Co., which houses the oil and gas interests of A.D. Gaines. Gaines Energy Holdings has interests on and offshore Louisiana and Texas, central Utah, and California.

Mr. Gaines served as Chairman of the Board of Directors, and founder of Dune Energy, Inc. since its formation in May 2001 through April 2011. Mr. Gaines also served as CEO of Dune Energy from inception through May 2007. In May 2007, Dune Energy completed the acquisition of Goldking Energy Corporation for $327 million, raising total proceeds of $540 million in senior notes and convertible preferred stock, as well as refinancing existing indebtedness in conjunction with the acquisition. Concurrent with the closing of the Goldking transaction, a new CEO was hired to oversee day to day operations.

Mr. Gaines has approximately 30 years experience as an energy investment and merchant banker, and has participated in the raising of debt and equity totaling tens of billions of dollars during his career. An acknowledged expert within the oil and gas space, over the years Mr. Gaines has been quoted by numerous oil and gas industry periodicals, as well as a multitude of magazines and newspapers on a global basis, such as The Wall Street Journal, Barron’s, The New York Times, Forbes, Fortune, Business Week, Financial Times of London, The Houston Chronicle, Platt’s, etc..

In 1983, he co-founded Gaines, Berland Inc., a full service investment bank/advisory and brokerage, specializing in global energy markets, with particular emphasis given to small to mid capitalization public and private companies, involved primarily in the exploration and production of oil and natural gas, as well as midstream (pipelines and transportation) and downstream (refining and marketing).

In the three years prior to selling his personal stake in the company, Gaines, Berland acted as lead underwriter and/or participated in the placement of more than $3 billion of equity and debt securities. >From 1984 through 1998, Mr. Gaines was Chief Advisor to financier Carl C. Icahn in all of Mr. Icahn’s investments within the energy space, including such highly publicized forays as Texaco, Phillips Petroleum, Unocal, United States Steel (Marathon Oil), Tenneco, Williams Cos., Western Company of North America, etc..

Mr. Gaines holds a B.B.A. in Finance from Baruch College (CUNY), and an M.B.A. in Finance (“With Distinction”-Valedictorian) from The Zarb School, Hofstra University Graduate School of Management.

An ex session and touring guitar player, Mr. Gaines was born in Brooklyn, New York, and currently resides in Beverly Hills, California.

Shayne Heffernan

Shayne Heffernan oversees the management of funds for institutions and high net worth individuals.

Shayne Heffernan holds a Ph.D. in Economics and brings with him over 25 years of trading experience in Asia and hands on experience in Venture Capital, he has been involved in several start ups that have seen market capitalization over $500m and 1 that reach a peak market cap of $15b. He has managed and overseen start ups in Mining, Shipping, Technology and Financial Services.

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