Continuing low prices, which have resulted in large part from an oversupply of natural gas, will prompt exploration and production (E&P) companies to cut dry gas capital expenditures (capex) by nearly 40% this year, Moody’s Investors Service said Friday.
E&Ps this year are also expected to cut by half the number of new dry gas wells they drill compared with 2011 levels, according to Moody’s Senior Vice President Terry Marshall. But the natural gas oversupply is likely to increase slightly from 2011 levels, he said.
“These business decisions by the E&Ps we surveyed are not directed at lowering supply, but rather at realigning production,” Marshall said.
The current oversupply — the result of increasingly cost-effective production from shale deposits, mild winter weather (see related story) and bloated storage levels (inventories stand at 2,761 Bcf, 817 Bcf higher than last year at this time and 765 Bcf above the five-year average, according to the Energy Information Administration (see Daily GPI, Feb. 17)) — is keeping gas prices low and leaves some speculative-grade E&Ps particularly vulnerable, Moody’s said.
“Five ‘B’ rated E&Ps that have gas-weighted production — Comstock Resources, Exco Resources, Penn Virginia, Quicksilver Resources and Carrizo Oil & Gas — look particularly exposed to weak natural gas prices in 2012. Unlike some of their competitors, these companies face greater stress from such factors as tight liquidity, strict covenants or approaching debt maturities.”
Higher-rated E&Ps that have shored up their liquidity and balance sheets will be better able to cope with lower cash flow, Moody’s said. “These companies have their better diversified product portfolios, higher-quality reserves, and superior access to the capital markets.”
Increasingly, E&Ps are finding it more economical to produce oil and natural gas liquids (NGL). “Some E&Ps will generate more than half of their revenue and cash flow from oil and NGLs in 2012, even while dedicating only 20% of their total production to oil and NGLs,” Moody’s said.
Drillers in northeastern Pennsylvania — the dry gas area of the Marcellus Shale — in the months ahead will stomp on the brakes with both feet and jam the dry gas freight train into reverse, according to an analysis by Bentek Energy LLC. Even if they do, a bulging gas surplus will fester behind pipeline capacity constraints for years to come, the firm said.
“…Northeast supply growth has outpaced capacity additions and local demand growth and led to a huge backlog of non-producing wells, exacerbating the potential for supply congestion and price weakness,” Bentek said in a recent Market Alert. “In response, producers have announced a 14% decline in total northeastern Pennsylvania (dry gas) rig activity.”
Drilling cuts are expected to be limited to northeastern Pennsylvania, which is where the play’s dry gas comes from. “The southwestern Marcellus and Utica are expected to see increased drilling,” Bentek said.
Supply-demand fundamentals in the Northeast make the current level of Marcellus drilling unsustainable this year, the analysis found. “Unless the well backlog can grow exponentially, there is inadequate pipeline capacity to keep pace with the current drilling and production growth. Moreover, even a 25% decline in rig counts still would leave the region capacity-constrained and eventually lead do a further buildup of the well backlog.”
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