Analysts at Standard & Poor’s Ratings Service (S&P) are asking themselves the same question that many in the energy industry are: “Will natural gas production ever come down?

“Frankly, we don’t know,” admitted S&P’s David Lundberg, analytical manager, during a conference call last Thursday. “We think it will be very interesting to watch. It does seem logical that you will see the rig count go down in some of the drier plays like the Haynesville and parts of the Barnett, parts of the Marcellus, perhaps, but that’s really being overwhelmed by the wet gas plays.”

In the wet gas world, producer economics are driven by natural gas liquids (NGL), of course. As long as gas prices don’t hit the $2.00-2.50 range, production from wet plays will likely offset the declines in dry plays, Lundberg said.

On the gas demand side, the outlook is “constructive,” longer term, he said. But a growing gas demand story is one that will be written over years, in increments, according to S&P.

As for NGLs, prices are mainly tied to those of crude oil, Lundberg noted. However, he conceded that earlier this year S&P was thinking that an ethane glut might force prices for that commodity down; however, that has turned out not to be the case.

“The petrochemical industry has shown a very good ability to debottleneck and convert to ethane-based feedstocks,” he said, noting that this is likely to continue. Longer term, though ethane prices could decouple from those of crude oil. “It’s something that we do have our eye on.”

Because for the most part midstream companies have more exposure to NGLs than natural gas prices, cash flows have been pretty good this year, Lundberg said, with many companies building scale and geographic diversity as they continue to shift to fee-based contracts with their producer customers.

As for the midstream players whose fortunes are more closely linked with natural gas, not so good. Exposure to natural gas prices and basis differentials in the low-price, tight-basis environment has made for a “more challenging recontracting environment,” he said.

Shifting basis due to the burgeoning production coming out of the Marcellus Shale — a next-door neighbor to the Northeast market — has taken a toll on Rockies Express Pipeline (REX), said S&P’s Bill Ferara.

“Its fundamentals have really changed over the last couple of years,” Ferara said. “The Marcellus has become very prolific in terms of current and expected production over the near term. As such, we have lowered Rockies’ [REX’s] rating; we did that last year. We recently changed their outlook to ‘negative’ back in July. Overall, its value is starting to diminish or has diminished because of the Marcellus.

“Positively, though, it does have contracts out to 2019. One of the reasons the pipeline was built was because of the basis spread environment at the time. In a draconian scenario if the pipeline was ever closed down for whatever reason, we would expect to see spreads reverse. So there certainly is value for that export capacity out of the Rockies. The specific value come 2019, we’ll have to see exactly how that plays out…They have some notes coming due in July 2013, so we’ll take a look at the refinancing that’s there, the spread that’s paid.”

Lundberg also noted that the midstream sector in general has been a big spender and is expected to remain so. Players tend to be highly levered and with spending expected to climb, S&P will be watching closely, he said.

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