Prashant Modi – Investing in Natural Gas

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Oil and Gas natural gas drill (Image credit: Getty Images via @daylife) – Prashant Modi

Those who wish to invest in publically traded natural gas companies usually find themselves presented with a huge amount of rather confusing information on the topic, which can often serve as a deterrent to understanding, and therefore being able to analyse the sector. Here, Prashant Modi provides some simple explanations on the most common terms and concepts surrounding natural gas investments.

The term ‘reserves’ is often used by investors in this sector; this refers to the quantity of natural gas which an energy company has on its land. These hydrocarbon reserves are then categorised as possible, probable or proved. According to Prashant Modi, the most significant reserve category from an investor’s perspective is the ‘proved’ one. Proved reserves are defined as those which engineering and geological data have determined to be recoverable from the energy companies reservoirs, based on the current operating conditions, government regulations and economic methods. The economic viability of these proved reserves has to be based on the average price of them over the course of twelve months.

The majority of natural gas companies will present the amount of proved reserves in their marketing materials; however Prashant Modi says that investors should be aware that the prices the companies use may be based on different calculations, and as such should always be compared with the price of proved reserves of other companies before an investment is made. With possible or probable reserves, natural gas companies are usually given the option of disclosing the prices in regulatory filings however because there is uncertainty surrounding these two categories, Prashant Modi says that investors should not rely too heavily upon these figures.

Another frequently used term in natural gas investment circles is ‘reserves to production ratio’; this is the measurement of the amount of time it would take in years, for an energy company to produce all of its proven reserves. As a general rule of thumb, a higher ratio is more beneficial for an investor. Lastly, a term which Prashant Modi says all natural gas investors should know is ‘basis differentials’; this refers to the price discounts available in certain regions, which some companies experience during the process of selling natural gas to the market; these discounts are affected by many different factors including the quality of the natural gas, the regional demand, the capacity of the natural gas pipeline and the weather.

natural gas rig

natural gas rig (Photo credit: jermlac) – Prashant Modi

Prashant Modi – The process of methane exploration

Exploring gas by Prashant Modi

The process of locating deposits of methane gas has changed significantly over the course of the last two decades, as a result of advancements in technology. Prashant Modi says that when the industry was still in its infancy, the only way in which methane could be found was through the search for evidence on the ground’s surface of formations underground. Any companies who wished to look for methane had to painstakingly search for seepages for months on end, often with no success. The entire process was long, costly and hugely inefficient. But as the demand for methane increased over the last twenty years, so too did the necessity for a more accurate method of exploration. As a result of this, new technology was developed which made the process far more effective.

Methane Pipe

Prashant Modi – Methane Pipe (Photo credit: isnoop)

At the core of the exploration process, specialists such as engineers, geophysicists and geologists will spend a good deal of their time analysing the structure of soil where deposits may be located, so that they can determine if hydrocarbons are present. Complex tests, such as seismic analysis are used in this process.

Once these tests have confirmed that a deposit of methane is present underground, the drilling experts will begin to dig a well down to the area where the gas is believed to be located. According to Prashant Modi, the decision as to whether or not to drill will depend on a number of factors, including the financial viability of the process. Drilling costs a great deal of money, and there is always the risk that the methane deposit will not be of a large enough quantity to warrant the money spent on searching for it.

If however, drilling does take place and this stage proves to be successful, the production process will then begin – this involves the extraction and processing of the methane. Delays often occur at this stage, as there is usually quite a lot of ‘red tape’ to go through in order to gain permission to begin production. Licences must be obtained by the energy company from the government of the country where the deposits are located and Prashant Modi says that this paperwork can take several months (and in some cases, years) to come through.