Chesapeake Energy Corp. and SandRidge Energy Inc. — which was started by some of Chesapeake’s founders — have announced that they will lay down some natural gas rigs because of continuing low prices.
Since early January, front-month natural gas futures values have fallen 35%, or $2.127, from $6.108/MMBtu to $3.981/MMBtu as of Thursday’s close.
The CEOs in separate presentations made the announcements at the Howard Weil Energy Conference in New Orleans.
Chesapeake CEO Aubrey McClendon, who helms one of the most prolific gas drillers in the country, told the audience that his company would “likely” be dropping 20 or more onshore rigs because gas prices have fallen to a “sub $5.00 environment.” The Oklahoma City-based producer currently is operating 118 rigs, which is down about 25% from 158 in August 2008. It has 70 non-operated rigs and 15 used for information only.
The company is “aggressively transitioning to oil plays,” and the goal is to have 20% of total production weighted to oil, McClendon told the audience.
Spokesman Jim Gipson told NGI that Chesapeake was “in the process of reducing our drilling program,” and would “articulate specifics” about the changes “at a later time.” The rigs are spread across Oklahoma, Texas, Louisiana, Arkansas, Pennsylvania and West Virginia. However, where the rigs would be taken down was not revealed.
SandRidge CEO Tom L. Ward told the Howard Weil audience that it was “totally uneconomical” for his company to continue to look for natural gas. The company, also based in Oklahoma City, is shifting its focus to oil, too.
About 85% of SandRidge’s revenue in 2008 came from natural gas, Ward noted. The company’s current output is 28% oil and 72% gas, but oil makes up about 54% of total revenue, based on 10-year futures prices, he said. “You can find the same amount of oil today as you do natural gas but you make 10 times more money drilling for oil wells.”
SandRidge made its move to oil because “we were concerned about moving forward with natural gas prices, especially the amount of rigs that were moving toward natural gas drilling horizontal shale wells,” said Ward. The horizontal wells are bringing on an “inordinate” amount of gas per rig.
The news by the two producers follows lower price forecasts this month by several energy analysts, including Barclays Capital, which this week cut its natural gas price forecast to $4.17/MMBtu (see Daily GPI, March 25). Bank of America Merrill Lynch earlier in March cut its 2010 price forecast to average $5/Mcf from an earlier prediction of $6 (Daily GPI, March 18). And analysts at Tudor, Pickering, Holt & Co. now expect 2010 gas prices to average $6.20/Mcf, down from $7.50 (see Daily GPI, March 15).
Despite the decrease in prices, ramped up activity in the country’s shale plays continues to grow the rig count. The number of drilling rigs actively seeking natural gas in the U.S. rose by 12 to 939 in the week ending March 19, according to the Baker Hughes Rotary Rig Count. Only one joined the search in the Gulf of Mexico, but 11 more were deployed onshore, Baker Hughes said. Its latest count is up 5% from a month ago and 10% higher than the year-earlier level.
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