Tickers in this Article: SD, CHK, KWK, EOG
Announcements from several exploration and production companies indicate a change in attitude by the industry from natural gas to oil, as many management teams ponder the possibility of too much supply of natural gas hitting the market over the next few years. This almost unimaginable situation is in direct contrast to the belief held by many at the top of the bull market several years back that natural gas production was in danger of "falling off a cliff" due to high decline rates. This attitude shift has been manifested by a reallocation of capital from natural gas to oil-related projects, and public pronouncements by management teams.

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Growing Concentration
Aubrey McClendon, the CEO of Chesapeake Energy (NYSE:CHK), who has always been the poster child for natural gas, announced that the company had built up a 600,000 acre position in "six large, new, unconventional oil plays," and plans to add 400,000 more acres.

SandRidge (NYSE:SD) held an analyst meeting in February 2010, and highlighted its shift over the last year to becoming a company based predominately on oil, with 50% of the present value of its reserves now oil. Management said that it was bearish on natural gas through at least 2012. SandRidge Energy made a large acquisition in the Permian Basin in late 2009 to help effect this change.

The research performed by the company indicated that 900 rigs are needed to keep natural gas production flat in the U.S., which is where the rig count is currently. Since the industry is planning a major ramp in 2010 and 2011, they are worried about an oversupply situation.

Oil Moves
Some companies have been planning an oil move for quite some time. EOG Resources (NYSE:EOG) has started development of its Barnett Shale combo play to the north of the current Barnett Shale activity. This area is weighted heavily toward oil and natural gas liquids, and the company plans to drill 246 wells here in 2010.

The company is also developing the Bakken oil play in North Dakota, and has divided its acreage into a core and a lite area. The company plans to operate a 12 rig program here in 2010.

EOG Resources had 70% of its production in natural gas, and estimates that by 2012, only 50% will be from natural gas, with the balance from oil and natural gas liquids.

Away From Natural Gas
Other companies are preparing for a "nuclear winter" in natural gas. Quicksilver Resources (NYSE:KWK) said during its fourth quarter of 2009 conference call that it has 80 wells slated for completion in the Barnett Shale over the next few months, but would cut back spending if it had to. "If the current gas prices continue throughout the year, we will probably reduce our capital spending appropriately," said Glenn Darden, the CEO of Quicksilver Resources.

Bottom Line
Some companies in the exploration and production industry see a weak natural gas market over the medium term, and are positioning the company away from natural gas and more towards oil. This is almost a 360 degree turn from where the industry was just a few years back. (To learn more, see Unearth Profits In Oil Exploration And Production.)

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