Falling natural gas prices have turned previously robust North American production anemic in 2001's second half, but counter-cyclical operations are helping companies withstand the downturn until gas prices rebound, drillers and E&P-company executives told participants in Deutsche Banc Alex. Brown Inc.'s 10th annual Global High-Yield Conference. "There's no question that most independents have cut capital spending significantly, especially in the last 60 days," said Gary Evans, chairman and president of Magnum Hunter Resources Inc., Irving, Texas. "We were planning to do that anyway. We had wells that we wanted to get into production and spent most of our 2000 capital budget early in the year to do so. As they come online, we will produce that gas, whether it sells for $1.50 or $3 per thousand cubic feet, because it's economical to do so. "However, it makes sense for producers to high-grade prospects in a lower pricing environment because service-company costs went up significantly. They're coming down now, but they're still relatively high." In its more than 20 years of operations, Swift Energy Co. has increased its production and reserves through the drillbit when gas prices have been high and with acquisitions when low. "We went into 2000 in a very low gas price environment, so we believed that we could drive production growth with acquisitions," said Swift executive vice president Bruce Vincent. "As we all know, prices accelerated quickly and the costs for reserves in the ground quickly did the same. In May or June last year, we decided to pull back from acquisitions and concentrate on drilling. That was easy for us because we have such a good inventory." Swift began to develop its plans for 2002 this summer, and they have changed since then. "We think the environment next year may present some very good opportunities for growth through acquisitions," he said. James J. Davis, chief financial officer for Parker Drilling Co., Houston, said, "It may seem that the energy industry is falling apart, with oil prices hovering around $28 and gas prices around $2. Unfortunately, when the jackup market gets cold, the platform-rig market gets pneumonia. "Remember, however, that nine months ago, the situation was much different. We could be back in that position nine months from now if there's a strong U.S. economic recovery and oil and gas demand picks up. The drilling industry has gone through this kind of swing before. The difference this time is that companies did not order new rigs when demand was high. We don't expect the industry to be plagued with the kind of surplus supplies we saw in the past." Until domestic demand recovers, Parker Drilling will try to put more of its international land rigs to work. "We expect more stability overseas. Operators have indicated that they plan to increase spending in onshore areas internationally."
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