Sunday, February 28, 2010

Prices Low but Producers Drilling Continues

By: Ben Casselman
Natural-gas producers are getting hit hard by sliding gas prices, but that isn't keeping them from drilling more wells.
Natural gas this week fell below $5 a million British thermal units for the first time since December, and is down 14% since the start of the year. That is hitting profits at big gas producers such as Chesapeake Energy Corp., EOG Resources Inc. and Southwestern Energy Co. Southwestern this week reported a $35.7 million net loss for 2009, although its fourth-quarter profits rose 51% to $158 million.
But despite the low prices, companies are increasing spending and drilling more wells. On Friday, Baker Hughes Inc. reported that the number of drilling rigs looking for natural gas onshore in the U.S. rose by 12 this week to 905 rigs, the highest number in over a year.
When gas prices began to fall in late 2008, big gas producers slashed budgets and reduced drilling. But the number of rigs drilling for gas has bounced back 36% since July, as energy companies plowed into new fields in Pennsylvania, Louisiana and elsewhere that remained profitable even at low prices.
The drilling rebound is keeping U.S. gas production high, bucking predictions it would fall along with prices. Gas production in the lower-48 states has declined just 1.2% since its peak in February 2009, and actually rose slightly in December from a year ago, according to government data released Friday.
Interest in such "unconventional" gas fields will likely drive the rig count even higher in coming months. Big independent gas producers plan to spend an average of 22% more on capital projects this year than last according to a study released earlier this month by IHS Herold, a consulting firm.
"There's renewed enthusiasm over U.S. unconventional gas. You can really see that in the spending," said Aliza Fan Dutt, an analyst with the firm.
Still, energy executives say that if prices remain below $5 a million BTUs, drilling will slow again, crimping production.
"I think $5 gas is not a sustainable gas price even for the best shale plays," Chesapeake Chief Executive Aubrey McClendon told investors this month.
Increased demand for drilling rigs has led service providers to raise their prices, squeezing profit margins for producers, said Jon Wolff, an energy analyst with Credit Suisse in New York.
There is some good news for producers, however. A cold winter has driven up demand for gas, depleting the huge stockpiles that had helped push down prices. Storage levels are now 2.9% lower than a year ago, according to government data released this week.
"It illustrates again the power of demand," said Subash Chandra, an energy analyst with Jefferies & Co. in New York.
Write to Ben Casselman at ben.casselman@wsj.com