Drillers Drilling to Hold Leases

By Moming Zhou

April 13 (Bloomberg) -- Natural gas rose in New York on speculation that producers may begin to reduce output and exploration after futures dropped 27 percent this year.

The number of gas rigs working in the U.S. rose to the highest level in 13 months last week, according to Baker Hughes Inc. Aubrey McClendon, chief executive officer of Chesapeake Energy Corp., said today that energy companies may begin to cut capital expenditures on gas and lean more toward oil production.

“With prices so low I would expect a decrease of rigs, and if they do that it would help boost the price of natural gas,” said Michael Rose, director of trading at Angus Jackson Inc. in Fort Lauderdale, Florida. “This testing of the $4 area is very important as gas is trying to build a base. I do think it can cycle a little firmer from here.”

Natural gas for May delivery rose 15.2 cents, or 3.8 percent, to $4.16 per million British thermal units on the New York Mercantile Exchange.

The number of gas rigs working in the U.S. increased to 959 in the week ended April 9, the highest level since Feb. 27, 2009, according to Baker Hughes. The total has risen 44 percent since July.

“Right now most of the industry drilling is quite involuntary,” McClendon said at a conference in New York, according to a transcript of his remarks. “Probably our drilling today might be two-thirds less than it is today if we weren’t trying to drill to hold leases rather than drill to respond to price incentives that are out there.”

“We’re only about 8 percent oil and our goal is to increase that to about 20 percent oil,” said McClendon, whose Oklahoma City-based company drills for gas in shale fields from Texas to the Northeast.

Production Cuts

Houston-based EOG Resources Inc said on April 7 that it’s exploiting new onshore crude discoveries and shedding some natural-gas holdings.

Oklahoma City-based SandRidge Energy Inc. said on April 4 that it will acquire Arena Resources Inc. for $1.55 billion in cash and stock as it turns its focus to oil rather than gas production.

Gas inventories rose to 1.669 trillion cubic feet in the week ended April 2, 12 percent above the five-year average, the Energy Department said last week. Stockpiles may reach 4 trillion cubic feet by the end of October, surpassing last year’s record of 3.837 trillion, according to analysts at Raymond James & Associates Inc.

Gas Fundamentals

“Obviously the fundamentals are not very good as this isn’t particularly a strong demand period,” Peter Beutel, president of trading adviser Cameron Hanover Inc. in New Canaan, Connecticut, said in a telephone interview. “But prices have gotten to a level where people are starting to see value in them, and it does look like prices may be trying to form a bottom here.”

The worst recession since the 1930s cut purchases of gas by manufacturers, steel mills and chemical plants by 7.7 percent in 2009, according to the Energy department.

Industrial demand will probably increase 6 percent this year, rebounding from last year’s low level, according to Cameron Horwitz, an analyst at SunTrust Robinson Humphrey in Houston.

Wholesale natural gas at the benchmark Henry Hub in Erath, Louisiana, fell 6.88 cents, or 1.7 percent, to $3.9661 per million Btu, according to data compiled by Bloomberg.

Gas futures volume in electronic trading was 288,942 contracts as of 3:26 p.m., compared with a three-month daily average total of 231,000. Volume was 332,883 yesterday. Open interest was 859,354 contracts, compared with the three-month average of 812,000. The exchange has a one-business-day delay in reporting open interest and full volume data.

--Editors: Bill Banker, Richard Stubbe

To contact the reporter on this story: Moming Zhou in New York at mzhou29@bloomberg.net.

To contact the editor responsible for this story: Dan Stets at dstets@bloomberg.net