Upbeat Natural Gas Producers Show Value of Low Expectations

Conference Review - HIS Energy CERAWeek in Houston, Texas, April 20-24, 2015

The price declines for oil and natural gas are equally brutal, with roughly a 50% decline for both fuels. But the mood of those working in the gas sector was upbeat at the recent IHS CERAWeek conference compared with those in oil.

The difference can be credited to the differing expectations. On the oil side, USD 100/bbl crude looked like a sure thing going forward until the price slid to around USD 50/bbl. Those on the gas side experienced a move within a low price range they have been living with for years.

That range roughly runs from a high of USD 5 to a low of USD 2 per MMBtu, which is near the recent price of about USD 2.50, said Dave Pursell, managing director, head of securities at Tudor, Pickering, Holt & Co.

“For the last 5 years, gas prices have been down,” said Steven Mueller, chairman and chief executive officer (CEO) of Southwestern Energy. While he said he would like to see prices rise, “we designed our company around low gas prices.”

The group has hammered down the cost of profitably producing gas and maximized output by targeting the best reservoir rock, most of which is in the Marcellus Shale. The same can be said of the other companies working in formations that mostly produce dry gas.

“Production has not only increased, it has accelerated,” Mueller said. He described the combination of ingredients that led to the surge as a “power function.”

The fortunes of oil and gas diverged in fall 2008. Initially, both oil and gas exploration plunged after the financial crisis led to a recession. While oil recovered in late 2009, setting the stage for the booms in the Bakken, Eagle Ford, and Permian formations, gas prices stayed low.

Both oil and gas drilling reached nearly the same peak when measured by the number of drilling rigs working. The top week for gas was 1,606 working rigs in mid-September 2008, while oil reached 1,601 in September 2014, according to the Baker Hughes weekly rig count totals. Since they hit their peaks, the number of rigs drilling for gas has sunk to 225 in late April while oil has fallen to 701.