Rising Costs, Low Gas Prices Seen Taking Time to Play Out
U.S. exploration and production (E&P) companies continue to find themselves “sandwiched in a vise of rising costs and low gas prices” that may take time to play out, an energy analyst said Tuesday.
Morningstar’s energy team noted at the end of June “how bad things had become for E&P firms and laid out the case for why we believe the twin dynamics of cost inflation and low gas prices are ultimately unsustainable,” said Eric Chenoweth.
The Morningstar team expects that “the story could take a few quarters to play out, as third quarter fundamentals now point to potential weakness in earnings power throughout the first half of 2011.”
The biggest cost increases for producers have hit the Haynesville Shale and portions of the Eagle Ford Shale, said Chenoweth.
Activity in the Haynesville should begin “to ease up in the back half of 2011, providing a measure of relief to cost inflation in this region,” he said.
“However, we also see activity set to accelerate in the Eagle Ford and other liquids-rich shale plays, leading us to conclude that the high-cost baton will probably pass from the Haynesville to liquids-rich plays like the Eagle Ford in 2011.”
Chenoweth pointed to Halliburton’s new strategy to offer discounted services pricing for dry gas-focused producers, which he said acknowledges “the economic challenges such firms are facing in today’s high cost/low gas price environment” (see Daily GPI, Oct. 19).
Halliburton CEO Dave Lesar said in October the new strategy would cut into the oilfield service company’s short-term revenues. However, “we believe it is important to stick with our loyal and key customers in this low dry gas environment and to work together to build a long-term market stability.
“We believe this effort has the potential to reduce the number of rigs our key customers may have to lay down in response to any future weakness in natural gas prices.”
Chenoweth said Halliburton’s strategy is “further confirmation of the unsustainability of the current earnings power environment for natural gas producers, and accordingly, we expect improvement beginning later in 2011.”
Morningstar’s “best natural gas investment idea” is Marcellus Shale-focused Range Resources Corp., said the analyst.
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