Higher operating costs, combined with a decline in natural gas prices, has led Calgary-based Compton Petroleum Corp. to slash its spending and reduce its drilling program for the rest of the year. Compton also said it would sell some noncore assets, estimated to be worth about C$100 million, and would consider selling off its major conventional oil properties to focus more on resource plays.

The independent, which earlier this year was named one of John S. Herold’s top exploration and production value creators (see Daily GPI, Jan. 27), on Wednesday reduced its budget almost 20% to C$465 million from C$575 million, mostly on reduced drilling and completion costs related to its shallow gas program in southern Alberta in the Western Canadian Sedimentary Basin (WCSB) and crude oil operations. Cash flow from operations is now expected to range between C$325 million and C$345 million, a drop from previous guidance of C$375-400 million.

Several other Canadian-based companies already have announced reduced spending this year, including EnCana Corp. On Wednesday, Anadarko Petroleum Corp. announced it would sell its Anadarko Canada subsidiary for an undisclosed amount (see related story), prompting some analysts to speculate that other mergers and acquisitions could be on the horizon.

Asked whether Compton might be up for sale, CEO Ernie Sapieha said during a conference call Wednesday the company was not considering it. “It’s just speculation,” he said. “We’re concentrating on our resource plays.”

CFO Norm Knecht added, “We expect there could be some M&A activity, but we wouldn’t be involved.”

“We now plan to drill 360 to 380 wells during 2006,” Sapieha said. “In addition to the specific considerations outlined…we have recognized the impact of current lower commodity prices on overall well economics. This is particularly relevant to tight gas wells, which experience high initial production rates.”

Sapieha said if it delays placing its gas wells onstream until prices move up, returns will improve. “A C$5.00/Mcf difference in realized gas prices can impact the return on a typical shallow gas well with a cost of C$550,000 by as much as C$120,000 during the first six months of production. The natural gas forward price curve would indicate a return to higher prices by year-end.”

The current “operating cost structure” in the WCSB led to the revised spending plans, said the CEO. “The industry continues to operate at maximum capacity with the inherent inefficiencies and cost pressures. The normally expected reduction in service costs subsequent to the winter drilling season and break-up has not, as yet, materialized. We expect this situation to improve. Recently, in reaction to lower gas prices and volatile capital market conditions, companies have begun to reduce their capital programs. These factors should begin to reduce industry activity and cost pressures.”

Compton also has been affected by an “industrywide shortage of qualified personnel, regulatory issues and uncertainties” related to what it said was the direction of global economic challenges.

“We expect the second half of 2006 will see the resolution of a number of factors that are currently affecting the North American energy industry. There should be some clarification as to the direction of global economies, interest rates and the demand side of the natural gas equation in North America. Certainly the impact of the summer heating and hurricane season on the current high natural gas storage levels will be known. In Western Canada, we believe a number of the shortages in services will be resolved and proposed regulatory initiatives will be finalized.”

The producer remains bullish on the longer-term outlook for natural gas and the value of its gas resource plays.

“Certainly, the recently announced Anadarko/Kerr-McGee/Western Gas transaction, among others, would appear to confirm this outlook,” said Sapieha. “Our goal remains that of building a premier natural gas-focused company that will provide superior returns to our shareholders. Our operational plans for the remainder of 2006 are consistent with that goal.”

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