While natural gas prices continue to languish, it’s likely that most producers care less than they did a year ago, thanks to the migration/stampede to liquids-rich production. The shift to liquids is expected by Barclays Capital analysts to continue, with a continuing effect on producer revenues.

By next year, a 20-company sample examined by Barclays analysts will derive 64% of its revenues from liquids production [natural gas liquids (NGL), condensates and oil], which represents a 19% increase from five years before, the firm said in a note last week.

The Barclays 20-company universe includes leading gas producers with a domestic focus; combined they produced 31% of U.S. gas supply last year. As early as 2009 the producer group’s revenue mix was shifting toward liquids, Barclays said. The shift continues because gas prices have continued to decline in North America on increased production while oil and liquids prices have increased, causing the spread between oil and natural gas prices on an energy-equivalent basis to widen, the analysts said.

“For the average producer in our sample, the production of liquids was roughly 26% of total production (on an energy-equivalent basis) in 2010,” they wrote. “This will increase a cumulative 5% by 2012 to 31% of total production, by our estimates.”

However, due to the widening chasm between liquids and natural gas prices, the effect on revenues will be more pronounced. “…[T]he revenue from liquids production, which was approximately 49% in 2010, is expected to grow a cumulative 15% by 2012 to 64% of total revenue for our sample companies.

“Since oil and NGL prices are much higher than natural gas prices on an energy-equivalent basis, small growth in liquids production amplifies the effect of liquids in terms of total revenue.”

Henry Hub spot gas prices, which are expected to average $4.02/MMBtu in 2011 — 37 cents/MMBtu lower than last year — will continue to decline, averaging just $3.70/MMBtu in 2012, according to the Energy Information Administration’s (EIA) latest Short-Term Energy Outlook (see related story).

Producers that have shifted to the liquids team will be rooting for higher oil prices. If natural gas prices were to drop by 20% from the Barclays-assumed $3.80/MMBtu in 2012 with oil prices unchanged, the hit to producer revenues in the Barclays universe would be 7%, excluding hedges.

However, if oil were to drop 20% next year with gas holding at $3.80/MMBtu, the revenue impact would be a negative 13%.

“By contrast, that same ‘average’ producer would have suffered a 10% revenue hit in 2010 from a 20% drop in gas prices while oil prices stayed the same, or a 10% drop in revenue from a 20% lower liquids price while gas prices stayed the same,” the analysts said.

Gas prices are still important to producers, though, the analysts said, noting that for 2012 “most producers are already adequately hedged.” With the greater reliance on oil prices for revenue support, “drilling budgets in general may not be as vulnerable to weak natural gas prices.”

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