Capital spending plans by North American producers this year indicate that they expect the lowest natural gas prices since 2004, with $4-6/Mcf being the "sweet spot," according to a survey by Barclays Capital.
"For 2011 the single most important factor for the North American natural gas market is U.S. domestic production," said analysts Jim Crandell, Biliana Pehlivanova and Michael Zenker. "The main factor driving production growth in 2011 has not changed from 2010: producers are operating an aggregate rig count that adds supply to the market sequentially."
According to a Barclays survey, the "common response" of exploration and production (E&P) operators when asked at what gas price they would decrease their spending plans was $4, "with $3.00 and $3.50 getting only slightly fewer votes."
However, if gas prices were $6.00 or higher, "producers would consider raising budgets."
Among the factors considered to be key determinants when setting E&P budgets, survey respondents said the "most important tends to change with the macro and price environment." Over the past decade, "drilling success and prospect availability have both decreased" in importance. "As well, natural gas prices and capital availability have decreased in importance."
Cash flow was voted as the "most important determinant of spending in 2011," Crandell and his colleagues said.
"On the whole, producers intend to spend a greater amount versus cash flow (CF) than in 2010, mostly because more producers intend to spend 'equal to CF' than 'less than CF.' There is roughly an equal share that plans to outspend versus spend less than cash flow in 2011."
The survey also highlighted how key the technologies of hydraulic fracturing/stimulation and horizontal drilling have become for operators in the last 10 years, said analysts.
"In 2000 these technologies combined were reported as 'most important' by only 23% of operators," with a producer only allowed to vote for one technology as "most important." In the latest survey, "hydraulic fracturing was voted the most important technology for the third year in a row and the two combined accounted for 53% of votes."
Several of North America's top E&Ps already have announced cutbacks to 2011 spending plans, noted the analysts. Among those cited by the Barclays team that have cut this year's spending are Encana Corp. (21%), Southwestern Energy Co. (12%), Devon Energy Corp. (10%), Williams Cos. (8%) and Range Resources Corp. Chesapeake Energy Corp., also has cut its production growth forecast in 2011 to 25% from 30-40%, they said.
"To us, these company-level plans do not yet materially change the supply picture for 2011 and it is unclear if a decrease in spending means a decline in production," said the analysts. "In addition, others intend to increase spending by a greater amount, so that an aggregate gain in spending is expected." And if gas prices were to rise, "producers could easily be urged to deploy more rigs."
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