Dry Gas Cuts Accelerate

By Eric Fox | February 06, 2012 AAA

A growing number of energy companies have decided to either reduce dry gas drilling or shut in production in the United States, with the expectation that this will lead to a more balanced natural gas market and higher prices. (To know more about oil and gas, read Oil And Gas Industry Primer.)

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Dry Gas Cuts
Comstock Resources (NYSE:CRK) has been scaling back drilling in the Haynesville Shale since 2010 and plans to end all development here by March 2012. The company plans to move its last two operated rigs to the Permian Basin in West Texas.

ConocoPhillips (NYSE:COP) is one of the largest producers of natural gas in the U.S., with production of approximately 2.5 billion cubic feet (Bcf) per day. Management said that approximately two-thirds of this production is associated with liquids production as well, and is still economic to produce in the current environment. Another issue for the company is that it has partners on many of its natural gas wells, making it difficult to shut in production on these wells.

The company plans to shut in approximately 100 million cubic feet (MMcf) per day of production that is unaffected by these two issues.

Some energy companies have pledged to fund 2012 drilling programs with internally generated cash flows, and are being compelled to cut capital expenditures as falling prices for natural gas reduces available cash flow.

Quicksilver Resources (NYSE:KWK) announced a $370 million capital budget for 2012, with $302 million dedicated to drilling and completion activities. In 2011, the company spent an estimated $690 million.

The company plans to spend $108 million to drill in the wet gas portion of the Barnett Shale in the Fort Worth Basin, and $82 million on new oil positions established in the Sandwash Basin in Colorado and Permian Basin in Texas. The balance of the funds will be spent on the Horn River Basin and other areas in Canada. Quicksilver Resources expects that this level of spending will keep production flat in 2012.

Go Fish
Exxon Mobil (NYSE:XOM) reported average daily production of 4 Bcf per day of natural gas in the fourth quarter of 2011, and has no current plans to shut in production due to low natural gas prices. The company has managed a low price environment by shifting rigs to wet gas plays in the U.S., and plans to keep operating between 65 and 70 rigs in natural gas plays.

Oil Services Impact
Some investors are concerned about the impact of these dry gas drilling cuts on the oil services industry. Helmerich & Payne (NYSE:HP) is one of the largest land drillers in the U.S. and is not concerned with this trend, believing that any reduced activity in dry gas plays will be made up with drilling in liquids areas.

"And while the gas-directed count will even now most likely accelerate its decline trend, many expect any fall out to be partially or fully offset by displaced rigs being redirected to oil and liquids-rich targets. This transition that has been underway since the summer of 2008 and may well become more pronounced and impactful, "said Hans Helmerich, CEO of Helmerich & Payne.

Helmerich estimated that only 10% of the company's rigs are currently working in dry gas plays.

The Bottom Line
The trickle of cuts in dry gas drilling in the U.S. has started to become a river, as more exploration and production companies announce planned drilling reductions or shut-ins of production in these areas. The markets will eventually decide if these actions will have enough of an impact and lead to meaningful reductions in supply. (For additional reading, check out A Guide To Investing In Oil Markets.)

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

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