A review of recent 2012 capital budget announcements from oil and gas companies provides more evidence of the shift in investment towards oil plays in the onshore United States. This increased investment is coming at the expense of natural gas development as various operators cut back spending in these areas. (To know more about oil and gas, read Oil And Gas Industry Primer.)

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

2012 Capital Budgets
Talisman Energy (NYSE:TLM) is shifting its focus away from dry gas development and estimates that the company's production of crude oil and other liquids will grow from 25,000 barrels per day in 2012 to 60,000 barrels per day by 2015.

Talisman Energy has budgeted $1.8 billion in spending in North America for 2012, down approximately $400 million from last year. The company will reduce spending in the Marcellus Shale and Montney Shale, where wells produce little or no liquids.

Talisman Energy expects to spend approximately 40% of the $1.8 billion on liquid plays, including the Eagle Ford Shale, where spending will increase to $500 million, up from $350 million last year.

Hess Corporation (NYSE:HES) has made a number of large investments in the onshore United States, including properties exposed to the Bakken, Eagle Ford Shale and Utica Shale.

The company has budgeted $2.5 billion in 2012 for the exploration and development of these unconventional plays, with the bulk of the funds destined for Bakken activity. The company will operate 15 rigs here in 2012, and estimates production will reach 60,000 barrels of oil equivalent (BOE) per day by the end of 2012.

Goodrich Petroleum (NYSE:GDP) used to be all about the Haynesville Shale, but in 2012 the company has allocated approximately 75% of its $235 million to $260 million drilling and completion budget towards liquids plays. More than 50% of this capital is heading towards the Eagle Ford Shale in Texas where the company plans to drill 29 gross wells.

Goodrich Petroleum will put only $60 million towards natural gas development in 2012, and expects the shift in capital to increase oil and liquids production to 5,000 barrels per day by the end of 2012.

Crimson Exploration (Nasdaq:CXPO) has budgeted $74 million in capital spending in 2012, as part of a strategy "designed to continue our transformation from a predominately natural gas producer to a more balanced" profile. The company will drill 15 wells into the Eagle Ford Shale and Woodbine formations to accomplish this goal.

CONSOL Energy (NYSE:CNX) plans to spend $755 million on natural gas development in 2012, with most of the funds destined for the Marcellus and Utica Shale. The company is also moving away from dry gas development as much as possible and has allocated 42% of this budget towards oil or wet gas development in these two plays.

No Hope in Sight
The reduction in dry gas development has not led to stabilization in the natural gas market so far, as domestic production continues to grow. The Energy Information Administration (EIA) reported in its most recent short-term energy outlook that marketed production of natural gas rose by 4.5 billion cubic feet (BCF) per day in 2011, the highest increase ever recorded. The EIA is looking for increases of 1.4 Bcf and 0.7 Bcf per day in 2012 and 2013, respectively. The increase in natural gas supply, coupled with a mild winter, has sent natural gas prices down to $2.69 per Mcf, the lowest level in years.

The Bottom Line
The fundamentals in the natural gas market continue to deteriorate as supply increases despite a marked shift away from natural gas development by the industry. Investors that are looking to assign blame for this debacle need only look in the mirror, as none of this could have occurred without access to the easy and painless capital that most of us have been throwing at the industry for years. (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. 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.
  2. 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.
  3. 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.
  4. 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.
  5. Charts & Patterns

    Understand How Square Works before the IPO

    Square is reported to have filed for an IPO. For interested investors wondering how the company makes money, Investopedia takes a look at its business.
  6. Technical Indicators

    4 Ways to Find a Penny Stock Worth Millions

    Thinking of trading in risky penny stocks? Use this checklist to find bargains, not scams.
  7. Professionals

    Chinese Slowdown Affects Iron Ore Market

    The Chinese economy's ongoing slowdown is having a major impact on iron ore demand.
  8. Investing Basics

    Why do Debt to Equity Ratios Vary From Industry to Industry?

    Obtain a better understanding of the debt/equity ratio, and learn why this fundamental financial metric varies significantly between industries.
  9. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  10. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
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. 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 >>
  2. 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 >>
  3. 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 >>
  4. 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 >>
  5. 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 >>
  6. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... 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!