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Low Costs, Better Technology Boost Some Producers' Output

The story related time and again by natural gas producers in their 2Q2009 earnings presentations has been the same at both large and small natural gas-weighted independents: lower costs and hedging cushioned the impact of low prices, but better technology continues to boost output.

U.S. service costs began to fall late in 2009 in line with a falling gas rig count. Even though the price of gas is lower than a year ago, the falling costs have enabled some producers to drill more wells -- in some cases to protect their leaseholds -- and that appears to be showing up in 2009 production guidance numbers. Even with less spending, output is trending up.

"One of the overarching themes that we have seen pretty much across the board as companies have reported is that they are simply getting more for less," wrote Curtis Trimble, a Natixis Bleichroeder analyst. "Not only do you have a cost function that's stretching your dollars further, but also on the production side, the companies are simply getting more out of the wells due to refined completion programs," compared with previous quarters.

For example, SandRidge Energy Inc. CFO Max Grubb said the company's hydraulic fracturing costs are down 67% from where they were in 2Q2008. "Open-hole logging is 53% below, mud costs has dropped 46%, bit costs are down 60%, and directional tools down 53%...These are all very low prices, very low costs that will be realized from now until the end of 2010."

Onshore operator Penn Virginia, whose Haynesville Shale wells have had some initial production rates above 20 MMcf/d, reported an adjusted loss of 14 cents/share in 2Q2009. But quarterly expenses dropped 21% from a year ago to $200.4 million. Meanwhile, net output jumped 19% to average 149 MMcfe/d. Year-end production is expected to be at the high end of its guidance of 131.5-137 MMcfe/d.

"As a result of our strong second quarter and first half results, we have kept our production guidance unchanged, with slight year-over-year production growth in 2009," said CEO James Dearlove.

Goodrich Petroleum, which has hit pay dirt in the Haynesville Shale, posted a quarterly loss of $1.02/share. However, production volumes climbed 22% to 82.1 MMcfe/d -- 1% above the high end of its forecasted guidance. Lease operating expenses fell 25% from 2Q2008. Going into 3Q2009, the producer is forecasting average production to be at the "high end" of its 78,000-82,000 Mcfe/d guidance.

And at Comstock Resources, a higher gas price realization coupled with lower operating expenses in 2Q2009 led analysts at SunTrust Robinson Humphrey/the Gerdes Group (STRH) to raise the producer's target price by $8 to $53/share.

Comstock, which also focuses development in the Haynesville Shale, as well as in the South Texas Wilcox/Vicksburg trend, should "exhibit 8% production growth in 2009," said STRH analysts. The independent is expected to produce around 64.5 Bcfe in 2009, which would be the midpoint of the company's guidance.

On Friday Baker Hughes said the number of rigs drilling for natural gas in the United States rose by four from the previous week to 681. The rig count now stands at around 890 gas rigs, which is 57% lower than the same time in 2008. In the week ending July 17, the U.S. gas rig count fell to 665, the lowest since early May 2002, when there were 640 rigs in operation.

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