North American explorers aren’t going to let a little thing like weak natural gas prices get in the way of record spending plans in 2012, a recent survey by Barclays Capital has found.
Producers today are “less sensitive to gas prices and more driven by oil prices,” analysts Shiyang Wang and Michael Zenker said in a note to clients.
“Our view is that the spending survey provides a mixed message for gas,” said the duo. “Producers may be more prepared to respond to lower prices with less gas-directed drilling. Yet the strength of oil prices is supporting budgets overall. But the fact that gas prices must fall to about $3.50 to get close to half of the respondents to cut spending suggests that producers are adapting quickly to lower prices.”
Barclays surveyed 339 exploration and production (E&P) companies worldwide, including 173 producers in the United States and 96 in Canada. Based on the North American responses, analysts concluded that E&P spending should be 8% higher in 2012, which is the same as the Barclays spending forecast for 2011 (see NGI, Dec. 20, 2010). For the second year in a row gas prices were not the leading factor in spending plans. Gas prices have been the most important factor in producer spending plans for 10 out of the past 13 surveys.
In the 2010 survey, analysts noted, “producers indicated that they would cut spending if [gas] prices fell below $4.00. This year more than half of respondents indicated that they would cut spending at $3.50. Similarly, most producers last year indicated that at prices above $6.00 they would increase spending. For 2012 about half of the respondents said they would increase spending at $5.00.”
Unlike Barclays surveys that were conducted from 2006 to 2010 — when natural gas was the principal motivation for North American E&Ps — “oil will be driving capital spending” in 2012, said Wang and Zenker. More than half of the respondents (54%) voted for oil prices as the biggest determinant of spending, followed by natural gas prices (47%) and cash flows (46%).
“At this time [in 2010] the gas price used by producers for 2011 capital budgeting averaged $4.27/MMBtu, which was the lowest since 2003,” noted the analysts. “On average, producers are using a $4.08 gas price for budgeting purposes for 2012.” Since 2008 producers had tended to use “a gas price that was higher than the resulting year’s price. We expect them to do so again for 2012, as we forecast that gas prices will average $3.80 next year.”
Producers will continue to drill as long as it’s economic to do so, the Barclays team said. Most producers said in 2012 they “expect to spend an amount that is either the same as or greater than cash flow. Yet a growing percentage of producers are planning to spend less than their cash flow than in 2011.”
Most of 2012’s capital expenditures are slated for oil and liquids-rich basins, with the “most popular location” to increase spending in the Permian Basin/West Texas region, which was chosen by 20% of survey participants. Other popular places for E&P spending in 2012 are the Midcontinent (18%), the Bakken Shale (11%) and the Marcellus Shale (7%).
In any case it’s too soon to tell if a pullback in gas spending will be a clarion call for bulls, said the analysts.
“Some market watchers view the recent pullback in the gas-directed rig count as producers’ response to low prices…In our view, it is too early to call the recent rig drop-off a turning point for gas. Both oil and liquids-rich drilling yield some gas. Given the current mix of drilling, the gas-directed rig count must fall below 750 to stall U.S. gas production. Plus, drilled-but-uncompleted wells and bottlenecked supply will combine to increase supply even with a moderate pullback in drilling. As a result, we continue to expect gas supply growth in 2012. If a faster-than-expected diversion of drilling to oil and liquids is under way, we will have plenty of data points to plot that shift.”
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