Chesapeake Energy (NYSE:CHK) announced major cuts in the company's dry gas drilling program in 2012 as this large exploration and production company looks to help balance supply and demand in the natural gas market. The company will also shut in a significant amount of its current dry gas production to help reduce supply.

Investopedia Markets: Explore the best one-stop source for financial news, quotes and insights.

Natural Gas Prices
Natural gas prices have fallen to $2.32 per thousand cubic feet, the lowest levels in a decade due to excess supply generated from domestic shale and unconventional plays, along with sluggish demand for the commodity.

Chesapeake Energy Throws Down the Gauntlet
Chesapeake Energy announced a number of actions to help improve the fundamentals in the natural gas market. It will reduce the number of rigs that it has operating in dry gas plays in the United States, implementing a 50% cut by the second quarter of 2012. (To know more about oil and gas, read Oil And Gas Industry Primer.)

This would reduce the rig count in these plays from the current level of 47, down to 24. These cuts are not the first for the company as it operated an average of 75 rigs in 2011. The 50% reduction will be instituted equally across the its properties in the Haynesville, Barnett and Marcellus Shales.

Chesapeake's total expenditures for dry gas development will total only $900 million in 2012, down from $3.1 billion last year, and will be the lowest level of natural gas spending for the company since 2005.

It also plans to shut in 500 million cubic feet (Mcf) per day of the company's operated natural gas production. This represents 8% of its current gross natural gas production of 6.3 billion cubic feet (Bcf). The company has a contingency plan to double the amount of shut in production to one Bcf per day if needed. It's not clear whether these actions were taken only to help balance the market, or also to cut production from wells that are not profitable to operate at the current low prices for natural gas.

Will It Work?
Chesapeake's actions appear to have had some short-term impact as natural gas futures increased in the wake of the company's announcement. One issue is whether other operators will mimic the market signal from Chesapeake and cut production as well.

Range Resources (NYSE:RRC), another major natural gas producer, announced its 2011 year end reserve report on the same day as Chesapeake Energy's announcement, and made no mention of any drilling or production cuts.

The market will be watching other large natural gas producers during the upcoming earnings season to see if any operators take similar action. The five largest natural gas producers outside of Chesapeake Energy include:

2011 Third Quarter Production

Companies Bcf Per Day
Exxon Mobil (NYSE:XOM) 3.9
Anadarko Petroleum (NYSE:APC) 2.2
Devon Energy (NYSE:DVN) 2
EnCana (NYSE:ECA) 1.9
BP (NYSE:BP) 1.8

(Source: Natural Gas Supply Association)

The Bottom Line
Chesapeake Energy flexed its market leading muscles in the domestic natural gas market with some dramatic cuts in natural gas drilling and production. This action may be for naught unless other producers match this company's bold move. (For additional reading, check out A Guide To Investing In Oil Markets.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

At the time of writing, Eric Fox did not own shares in any of the companies mentioned in this article.

Related Articles
  1. Markets

    The 5 Biggest Chinese Natural Gas Companies

    Read about the top five Chinese natural gas companies as measured by gas production volume and learn a little more about their business operations.
  2. Economics

    Who Wins With Low Energy Prices? 

    Low oil prices are here to stay for some time. Which economies will benefit or lose from the low oil price regime?
  3. Options & Futures

    Analyzing The 5 Most Liquid Commodity Futures

    Crude oil leads the pack as the most liquid commodity futures market, followed by corn and natural gas.
  4. Term

    What are Non-GAAP Earnings?

    Non-GAAP earnings are a company’s earnings that are not reported according to Generally Accepted Accounting Principles.
  5. Mutual Funds & ETFs

    ETF Analysis: PowerShares FTSE RAFI US 1000

    Find out about the PowerShares FTSE RAFI U.S. 1000 ETF, and explore detailed analysis of the fund that invests in undervalued stocks.
  6. Options & Futures

    Use Options to Hedge Against Iron Ore Downslide

    Using iron ore options is a way to take advantage of a current downslide in iron ore prices, whether for producers or traders.
  7. Stock Analysis

    Fortinet: A Great Play on Cybersecurity

    Discover how a healthy product mix, large-business deal growth and the boom of the cybersecurity industry are all driving Fortinet profits.
  8. Stock Analysis

    2 Catalysts Driving Intrexon to All-Time Highs

    Examine some of the main reasons for Intrexon stock tripling in price between 2014 and 2015, and consider the company's future prospects.
  9. Stock Analysis

    Net Neutrality: Pros and Cons

    The fight over net neutrality has become an amazing spectacle. But at its core, it's yet another skirmish in cable television's war to remain relevant.
  10. Savings

    Do Natural Gas Prices Always Follow Oil Trends?

    Prices for oil and natural gas are highly correlated. But investors should be aware of different factors affecting the prices of these commodities.
RELATED TERMS
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Profit Margin

    A category of ratios measuring profitability calculated as net ...
  3. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis ...
  4. Debt Ratio

    A financial ratio that measures the extent of a company’s or ...
  5. Price-Earnings Ratio - P/E Ratio

    The Price-to-Earnings Ratio or P/E ratio is a ratio for valuing ...
  6. Net Present Value - NPV

    The difference between the present values of cash inflows and ...
RELATED FAQS
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the formula for calculating compound annual growth rate (CAGR) in Excel?

    The compound annual growth rate, or CAGR for short, measures the return on an investment over a certain period of time. Below ... Read Full Answer >>
  3. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  4. When does the fixed charge coverage ratio suggest that a company should stop borrowing ...

    Since the fixed charge coverage ratio indicates the number of times a company is capable of making its fixed charge payments ... Read Full Answer >>
  5. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  6. What is the difference between the return on total assets and an interest rate?

    Return on total assets (ROTA) represents one of the profitability metrics. It is calculated by taking a company's earnings ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!