Chesapeake Energy Corp. and SandRidge Energy Inc. — which was started by some of Chesapeake’s founders — announced last week 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 37%, or $2.236, from $6.108/MMBtu to $3.872/MMBtu as of Friday’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 nonoperated 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 cut its natural gas price forecast to $4.17/MMBtu (see related story). Bank of America Merrill Lynch earlier this month cut its 2010 price forecast to average $5/Mcf from an earlier prediction of $6 (see NGI, March 22).

Meanwhile, Tudor, Pickering, Holt & Co. revised its 2010 gas price forecast lower by more than $1 to $6.20/Mcf, from $7.50, and an analyst with IHS Cambridge Energy Research Associates predicted prices could fall below $4 this year (see NGI, March 15).

Barclays analyst Jim Crandell on Friday said in a note the “old maxim in commodity land that ‘high prices cure high prices,’ and vice versa, seems broken for U.S. natural gas. Reeling from prices that averaged just $4.16/MMBtu in 2009 and reached as low as $2.51/MMBtu, the gas market is still in search of equilibrium fundamentals.

“A firm hand in cutting the level of drilling (rig count) in 2009 provided only false hope, as domestic production hardly fell, speaking to the incredible productivity gains achieved in moving rigs to high-initial production shale and in upping the number of frac stages performed per well.”

In addition, said Crandell, “operators, ever eager to show production growth to their equity investors and with ample hedges in place for 2010, have already lifted drilling activity from the July 2009 low of 665 to 939 gas-directed rigs currently. A greater share than ever are horizontal. While some producers have announced plans to curtail drilling (and we model a small decrease in rig count near year-end in our balances), it is not enough.”

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.

©Copyright 2010Intelligence Press Inc. All rights reserved. The preceding news reportmay not be republished or redistributed, in whole or in part, in anyform, without prior written consent of Intelligence Press, Inc.