E & P Industry Continues To Cut Dry Gas Development

By Eric Fox | May 09, 2012 AAA

The exploration and production industry reported further cuts in spending on the development of dry natural gas properties, as capital continues to shift towards oil and liquids play in the United States and elsewhere.

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Ultra Petroleum
(NYSE:UPL) is active mostly in the Marcellus Shale in Pennsylvania and the Pinedale Field in Wyoming. The company's original capital budget called for $650 million in development spending on these two areas in 2012.

The new budget, which was updated in conjunction with first quarter of 2012 earnings, calls for $550 million in development spending in 2012, with a $50 million reduction in each area. The company cited "continued deterioration of natural gas prices" for the reduction in capital spending.

In 2011, Ultra Petroleum spent $1.3 billion in drilling capital, so the updated budget represents a large reduction from last year. The new capital budget is expected to generate from 2 to 6% annual growth in production for the company in 2012.

SEE: Oil And Gas Industry Primer

Southwestern Energy (NYSE:SWN) spent $573 million in capital during the first quarter of 2012, with approximately 93% of the funds directed to the company's exploration and production business. The company plans to spend about $2.1 billion for the full year and has decided to shift an additional $50 million of that budget towards the development of plays within the company's New Ventures portfolio.

These emerging plays all produce oil and other liquids and include the Lower Smackover Brown Dense formation and several others in the Denver Julesburg basin in Colorado.

Talisman Energy (NYSE:TLM) is one of the largest producers of natural gas in North America, with average production of 1.02 Bcf per day in the first quarter of 2012. The company's original budget, released in January 2012, called for spending of approximately $4 billion in 2012, down by $500 million from 2011. The reduction in capital spending by Talisman Energy came out of dry natural gas areas.

The latest spending plan reduces the capital budget to $3.6 billion for 2012, and cuts dry gas development spending even further. The company now plans to spend only $200 million on dry gas development for the rest of 2012.

Exxon Mobil (NYSE:XOM) is also shifting drilling activity away from natural gas development in the U.S., where the company is currently operating 61 rigs. Exxon Mobil has been shifting rigs to "liquids rich plays" in 2012, including the company's properties in the Bakken and Permian Basin.

SEE: What Determines Oil Prices?

The Bottom Line
The exploration and production industry implemented draconian cuts in spending on dry gas development in North America in 2011, and has continued to announce additional cuts in the first quarter of 2012. This capital discipline is needed to reduce future supply of natural gas, and should be welcomed by all investors.

SEE: 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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