Plus, More Details On Chesapeake And EOG’s Shifts In Emphasis To Liquids
If major U.S. gas producers increase their capex emphasis on drilling for oil, natural gas supply should fall as well as oilfield-service costs, resulting in improved gas prices and an improved profit margin too for players who tough it out.
But that won’t happen—at least not soon—according to Dave Pursell, managing director and head of macro research for Tudor, Pickering, Holt & Co. Securities Inc.
Pursell and the TPH team of analysts slashed their gas-price forecast today to $4.50 Nymex for second-half 2010 (from $6.50) and to $5 for 2011-2012 (from $6.50), drastically below the Wall Street commodity-price-forecast consensus and even the Nymex strip itself. Their 2013-and-beyond forecast is now $6 (down from $6.50).
Pursell says that, while producers are increasingly stating a shift in drilling emphasis from gas to oil, “independents cannot shift capex quickly enough…Gas production—in our coverage universe—is still expected to grow 10% year over year in 2010 and 16% in 2011.”
He adds that producers are taking 2011 hedges at between $5 and 5.50, “signaling a willingness to continue to invest at those levels.” Many of them plan to outspend cash flow. And, he notes “the realities of above-average storage levels, the stubbornly resilient gas-directed rig count and the corresponding production growth that is resulting from record horizontal drilling.”
Gas producers’ stock prices are experiencing “shale exhaustion.”
“Bottom line: This industry is drunk on shale liquor and can’t get sober fast enough to avoid a low-commodity-price hangover. In 2010, our coverage universe will spend $52 billion compared with $37 billion in 2009…In 2011, spending is targeted at $57 billion.”
Two major U.S. gas producers are reducing shale-gas spending. Chesapeake Energy Corp. stated last week that its emphasis will be a weighting to liquids by 2012. Also, EOG Resources Inc. now expects its 70%-natural-gas production profile of 2008 will be reversed to 70% liquids by 2012.
Chesapeake can move a gas market. It produces 2.8 billion cubic feet equivalent per day, 90% gas. It plans to take $400 million of capex planned for gas projects in 2011 and spend it on drilling for liquids instead. Operated net drilling and completion capex on liquids plays will grow from 13% of Chesapeake’s total 2008 capex budget to approximately 55% in 2012.
Going forward, at sub-$6 gas, it plans to drill gas wells only to hold acreage or if being carried by a drilling partner.
Meanwhile, EOG Resources Inc. reports it’s unlikely to increase its projected North American gas volumes if a gas-price recovery occurs. It expects its 2012 production of 70% liquids will consist 75% of crude oil and condensate, 25% natural gas liquids (NGLs).
Mark Papa, EOG chairman and chief executive, suggests noting whether a company’s increase liquids production is oil or NGLs. “…As other E&P companies have subsequently proclaimed themselves to be ‘liquids rich,’ the distinction between crude oil and lower-valued NGLs seem to have been blurred.”
Regarding NGLs, Pursell says, “We expect regional pricing dislocations driven by E&Ps chasing liquids-rich plays that will result in continued pressure on natural gas liquids as a percentage of crude oil prices. (Second-quarter) NGL realizations have dropped from 50% of crude (2009) to 47% of crude (2010).” The price may be 40% of crude in this quarter, he adds.
For gas-weighted producers, there is one hope: Since the TPH analysts erred on the side of bullish gas-price expectations a year ago for 2010 ($7.50, revised in May to $6.20), their slashing today to far below Wall Street consensus, and even the strip, may reverse the curse and push prices higher.
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