More Companies Cut Dry Gas Drilling

By Eric Fox | February 14, 2012 AAA

The exploration and production industry has announced additional cuts in dry gas drilling as it looks to manage the terrible short term fundamentals that are plaguing this commodity. These will probably not be the last cutbacks seen during the current earnings season. (To know more about oil and gas, read Oil And Gas Industry Primer.)
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First Mover
Chesapeake Energy (NYSE:CHK) was the first major exploration and production company to announce cuts in drilling and production shut ins due to low natural gas prices. The company has already shut in 500 million cubic feet per day of natural gas production and may increase this to one billion cubic feet per day if conditions warrant further cuts.

Snowball Effect?
BG Group (OTCBB:BRGYY) announced a draconian reduction in dry natural gas drilling in the United States for 2012. The company is involved with Exco Resources (NYSE:XCO) in a joint venture to develop properties in the Marcellus Shale and Haynesville Shale plays.

BG Group now expects to use an average of only eight rigs in 2012, compared to 35 in 2011. This planned reduction will obviously impact production growth going forward, and the company now expects to achieve production from United States shale gas areas of 80,000 barrels of oil equivalent (BOE) per day by 2015. This is 110,000 BOE per day less than the previous target levels.

Unit Corporation (NYSE:UNT) announced that it "may act" to curtail up to 20 million cubic feet per day of natural gas production in response to low natural gas prices. This is a fairly significant cut for the company and represents 16% of its natural gas production, and 9% of its total company wide production.

Unit Corporation has already incorporated lower natural gas prices into its capital budget for 2012, and plans to spend $385 million for drilling and completion activities during the year. This is an 11% decline from the amount spent in 2011.

WPX Energy (NYSE:WPX) original plan was to spend from $1.2 billion to $1.8 billion in capital in 2012 on various oil and natural gas projects in its portfolio. The company has reduced its capital budget in response to low natural gas prices, and now plans to spend no more than $1.2 billion in capital during the year.

WPX Energy said that $400 million in cuts will be from natural gas basins in the company's portfolio, and the company plans to reduce its rig count in these areas by 40% or ten rigs relative to the previous capital plan.

BHP Billiton (NYSE:BHP) made a major investment in the Fayetteville Shale in 2011, paying $4.75 billion to enter this play. The company is reducing the number of rigs working in this dry gas area from eight to six due to low natural gas prices.

The Bottom Line
Although the cuts in dry gas drilling keep coming, it may be some time before the cumulative impact of these reductions have a measurable effect on natural gas supply in the United States. (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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