Will The Last Pure Natural Gas Company Please Turn Out The Lights?

By Eric Fox | January 18, 2012 AAA

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.)

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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.)

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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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