The swift drop in the natural gas drilling rig count across the Rocky Mountains has led to double-digit declines for some drilling services, and more are expected in the months ahead, Bill Barrett Corp. officials said Tuesday. Lower service costs will help the independent keep its costs in line, but it also is preparing for what may be "radical" changes in gas prices through the year, said CEO Fred Barrett.
Barrett and his management team offered their views on what they think is ahead for not only their Denver-based company but other Rockies gas producers during a quarterly earnings conference call. The company earned $6.89 million (15 cents/share) in 4Q2008, up from $2.48 million (6 cents) in 4Q2007.
Too much uncertainty exists to forecast 2009's expected challenges, but with so many rigs coming down, the CEO said there are some slightly encouraging signs down the road. But not in the near term.
"The expected supply declines plus sizable new [transportation] capacity in the Rockies should improve future pricing," Barrett said. "The macro economic environment is presenting challenges to the industry, but we're leveraging the positive effects on sector costs."
Costs are tumbling for almost every kind of well service, COO Joe Jaggers told analysts. The lower costs might entice some producers to take advantage, but Barrett will wait out completing some wells until the costs come down even more, he said. Until then, the company is preparing wells for completion and testing some areas in the Piceance, Uinta, Powder River, Wind River and Paradox basins.
In January Barrett announced it would spend $400 million for capital programs this year. However, with gas prices still low, it reset capital expenditures for 2009 at $350 million, which is around 42% less than it spent in 2008. The spending cuts are expected to impact output as well; annual production guidance now is forecast at 84087 Bcfe, lower by 1-4 Bcfe than the January estimate. Even with lower output, Barrett's gas-heavy production still would be 8-12% higher than in 2008.
"We are optimistic that a 42% decline in drilling rigs in the Rockies could potentially translate into production declines in 2010, reversing or moderating supply," said the CEO. "Declining supply should improve the commodity prices. More specifically for the Rocky Mountain region, more takeaway by the summer of 2011, including the [proposed] Ruby Pipeline, should bode well." El Paso Corp. is building the Ruby pipe to carry Rockies gas supplies to the West Coast. Ruby is said to be on track for completion in 2011 (see related story).
Until conditions improve, Barrett plans to tread cautiously.
"Seventy-five percent of 2009 production is hedged; 60% of 2010 is hedged," the CEO said. "In the periods of low pricing, we'll exercise discipline, including the option to shut in and defer to better markets."
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