Houston-based Edge Petroleum Corp. is deferring some of its planned domestic natural gas drilling activity until there is a "better balance of supply, demand and costs," the company's CEO said.

The announcement by Edge last week stands in sharp contrast to the company's statements in June, when it said its oil and natural gas wells in New Mexico, South Texas and the Arkansas Fayetteville/Mooreville Shale plays were exceeding expectations (see NGI, June 25). However, the independent was hit particularly hard in 3Q2007, according to CEO John W. Elias. There was a temporary loss of production in the Fayetteville play, a weather-related shut-in because of flooding in San Patricio County, TX, and a dry hole at the South Hardin field in southeast Texas. Collectively, the items led to a loss of about 0.5 Bcfe of forecasted output for the quarter.

"Compounding the loss of this expected production, natural gas prices since the first quarter of 2006 have taken a divergent path from crude oil," said Elias. He noted that recent spot prices for gas in Texas have been as low as $5.50/Mcf. "Given Edge's predominant weighting towards natural gas in its reserves and production, this gas price decline has reduced the expected cash flow as compared to Edge's original budget and plan. The recent growth in U.S. gas production, increased imports of LNG [liquefied natural gas] and a warm 2006/2007 winter and slowing economic growth have all pushed gas storage to record levels and reduced gas prices."

The risk has increased that the oversupply of gas could persist, and gas prices are "heavily dependent upon weather in the upcoming heating season," he said. Because of all of the risks involved, "we believe it is in the best long-term interest of our shareholders to defer some of our planned natural gas drilling activity and live within our cash flow until we see a better balance of supply, demand and costs."

Among other things, Edge elected to terminate an exploration joint venture in South Texas with a private company. In exchange for terminating the venture, Edge said it would return all 3-D seismic data covering the area of mutual interest in Duval and McMullen counties in Texas and recover its payments made to the private company, which total about $5.5 million. The termination eliminated the three to four wells Edge had planned to drill this year and the capital expenditures associated with those wells.

Once Edge had reviewed the new and reprocessed 3-D data, "we did not see the large exploration prospects that drove our initial interests in the area," said Elias. "That knowledge, coupled with a divergent strategy between ourselves and the operator of the venture, caused us to seek an exit from the transaction, which was agreed to by the operator."

Also, Edge has placed a group of assets up for sale. Primarily located in Texas, the properties represent less than 10% of Edge's proved reserve base; proceeds would be used to reduce debt.

Edge now expects to spend $125-130 million in its capital program for 2007 excluding acquisitions. Most of the cuts in spending comes largely from the deferral of drilling in Mississippi and Arkansas into 2008 and the termination of the South Texas exploration venture. Edge revised its production forecast for 3Q2007 downward almost 11% to 6.1-6.3 Bcfe. It expects to produce 24.7-25.3 Bcfe for the year, which is about 7% lower than forecast.

On the "disappointing results," SunTrust Robinson Humphrey/the Gerdes Group analysts John Gerdes and Michael Dane lowered their target price on Edge by $3/share to $17/share.

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