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S&P: U.S. Gas Prices Pressured for One to Two Years

U.S. natural gas prices will remain under pressure for one to two more years because ample gas supplies haven't budged despite a cold winter, and consumption is failing to keep pace with the economic recovery, a Standard & Poor's (S&P) credit analyst said Wednesday.

Several S&P analysts held a conference call to discuss the North American oil and gas industry, offering their credit outlooks for exploration and production (E&P) companies, oilfield services and the midstream industry.

Patrick A. Jeffrey, who offered the outlook for North American natural gas, said through 2011 the credit outlook for E&Ps continues to be solid.

"Despite low gas prices resulting from excess supply and expectations for modest growth in consumption, favorable hedging positions may help U.S. exploration and production companies avoid any material negative ratings action -- for this year, at least," he said.

Because of "high supply levels, we have modest expectations" for gas prices and "are cautious in our outlook for 12 to 24 months...Our price deck for natural gas is $3.75/MMBtu in 2011, $4.00/MMBtu in 2012 and $4.50/MMBtu thereafter," said Jeffrey.

"Supply is expected to remain relatively high in 2011 and improve somewhat in 2012...Consumption of U.S. natural gas has remained relatively weak as the U.S. economy has continued its modest recovery."

E&Ps, however, continue to "aggressively" drill, Jeffrey noted. "E&P companies are drilling to achieve HBP [held-by-production] status and to hold acreage, and many E&Ps have attractive hedge positions. And there still are low cash costs for drilling in many natural gas plays, like the Marcellus."

Even though there's been a shift to "more liquids-rich plays, there's still going to be natural gas as a byproduct in areas such as the Eagle Ford and the Bakken" shales, he said.

There also are possible problems ahead for gas-directed producers, the S&P analyst said.

"Speculative-grade companies that have concentrated natural gas assets are most likely to be impacted," Jeffrey said, as drilling remains high. These companies are "typically small scale and have more concentrated asset bases than investment-grade companies."

Many producers also are going to see their "favorable hedging positions begin to roll off later this year," said the analysts. When that happens, "producers will have to manage capital expenditures and costs in order to maintain credit quality."

Even with ample gas supplies, the Marcellus Shale will not be as impacted as other onshore plays, Jeffrey said. "In the Marcellus we will see continued drilling because the costs are lower. We see a shift to liquids plays...but producers will be looking at their cost positions in those plays...

"Overall, we don't see it boding as well for natural gas production in the near term, but oil benefits with a bigger focus on the Bakken; we expect to see oil production growth that is much more healthy."

S&P continues to monitor the call for increased regulations in the gas patch. "We think to date we haven't seen a significant impact on drilling activity," said Jeffrey. "We will see how it evolves and whether it plays a role in how companies manage their drilling expectations, whether regulations are going to be put into place to provide more safety...We will continue to follow it, but we don't see it in the near term as an issue."

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