Standard & Poor's Ratings Services (S&P) is casting a wary eye on gas-weighted North American producers with low-speculative-grade ratings. Such firms could face downgrades if gas prices fall below $6.50/Mcf, S&P warned in a note last week, but it conceded that gas prices should see support from fundamentals.

According to S&P, short-term North American gas prices will be dependent upon a number of factors, such as:

"Even though the weather causes volatile domestic natural gas prices in the short term, supply and demand fundamentals support favorable pricing in the long term," S&P said. "Sharper decline curves in the U.S., combined with the high marginal cost of finding and producing natural gas despite flattening oilfield service rates, should prevent any sharp fall from current prices."

Further, the ratings agency predicted continued cautious capital spending by major producers, influenced by cost inflation, long-lead-time development projects and resource nationalism around the world. North American independents, particularly those aiming efforts at unconventional natural gas, will be another story.

"Several of the independents...have significant undeveloped acreage in nonconventional resource plays -- explaining in part the difference in spending patterns," S&P said. Of note are Chesapeake Energy Corp., Southwestern Energy Co. and XTO Energy Inc.

Domestic dry gas production has remained relatively flat despite a doubling of the U.S. rig count since 2002, S&P said. And "liquefied natural gas imports increased substantially in 2007, but they remain a relatively small source of supply and are unlikely to meaningfully depress prices in the near term. Consequently, strong demand, steep decline curves and limited imports should support natural gas prices."

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