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Gas Storage Levels, Prices Not Expected to Impact E&P Drilling Plans

Natural gas storage levels may be high and gas prices may be lower, but those factors likely won't delay domestic drilling plans on- or offshore, energy executives said last week.

Speaking at the UBS Global Oil & Gas Conference in Austin, TX, Anadarko Petroleum Corp. CFO Robert Walker said gas "looks like it's on a trend for the next four months to be softer," remaining in a range of $5-6/Mcf. But Walker said Anadarko has no plans to shut in gas, even with high storage builds.

"When you live through $1 wellhead gas, as I have, you just didn't have much margin to live with," Walker said. "But as far as shutting in gas and having to see what gas prices do...We're really not well served by shutting in gas. You may not have the wellhead price you want, but Anadarko will not be shutting in gas."

When gas prices are lower, Anadarko adjusts by slowing down its drilling activity, he said. The lower gas prices usually lead to lower service costs, and when that happens, Anadarko adjusts its capital spending.

"I think like many, we're not just sort of stuck in motion in a drilling cycle," Walker said. "We still see fairly attractive economics with the wells that we want to drill. We're not a big shale player currently, and we don't have some of the [lease operating expenses] associated with those types of wells.

"If we do start to see lower prices, $6, $5, yeah, we would adjust," Walker said. "We like to see our [capital costs] sustained with our cash flow. But if prices slow down, if we did start to see prices sustained at $6, we'd expect to see service costs also come down."

Following a run-up in prices after last year's hurricanes, Anadarko is "seeing some flattening on rigs and service costs" in the Gulf of Mexico, Walker said. "We're having rig companies coming to us with option contracts. Last year, we didn't see that. It's an indication of weakness in the market."

Even if lower gas prices are sustained for the short term, Anadarko doesn't plan to initiate a hedging strategy, he said. "If we were [a] low-investment-grade credit [company], it would be almost silly not to do a lot of hedging. But for us, it's not necessary. Hedging...I would call it buying insurance without knowing the cost of the premium. Overall, we don't need to hedge because we're not leveraged like some other companies."

Anadarko is "not allergic to hedging, but at our size and our structure, we don't need to buy insurance or start a hedging program. We're just not good enough at predicting prices. Very acquisition-minded companies are wise to do it. But their modus operandi is different from ours."

Newfield Exploration Co.'s David Schaible, executive vice president, Operations & Acquisitions, agreed that "costs in general have leveled off in the last three months or so. We've seen no rig rate increases in the last three months."

But Newfield also cannot follow every fluctuation in the price of gas. Instead, Newfield uses a dollar-cost average to manage its costs, Schaible said.

"If we're making good investments, it averages out, and we'll make good returns," he said. "We can't step on the accelerator and then step on the brake. What's in the storage report? If it's wrong, if it's right...service costs have to come down to stay in sequence. It works out.

If gas prices drop in the next few months, Newfield, unlike Anadarko, is "an active hedger," said Schaible. "That's a place to focus right now. Through 2007, we're 50% hedged. We're pretty much insulated to what gas prices do this summer."

Mike Watford, CEO of Ultra Petroleum Corp., said the lower gas prices have offered his company a good opportunity to begin its first share repurchase program. Just a few days ago, the company authorized a share repurchase of up to an aggregate $1 billion of common stock, or about 10% of its total equity market value. It has already begun to purchase up to $250 million of shares through open market or privately negotiated transactions funded by cash on hand and its senior credit facility.

"The current softness in natural gas prices, and subsequently in our equity value, offers us a unique opportunity to deliver near-term value to our shareholders by repurchasing shares at an attractive price," Watford said. He said Ultra was able to offer the share repurchase not only because of the softer gas prices but also its growth prospects, centered on the Green River Basin of southwestern Wyoming.

"Our gas reserves are going to grow," said Watford. "The assets are only going to be worth more going forward."

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