Chesapeake Energy’s shift to oil might be an indication of better natural gas prices in the future. The company operates close to 20% of the U.S. onshore rig count and is a good sample set. With on 25% of capital spend allocated to natural gas in 2012, the hope is natural gas production will stop growing and we’ll see natural gas prices that incite drilling. Most oil & gas companies say prices of $5-$6/mcf is needed to ensure long-term development.
Better gas prices will mean quicker development of your minerals. Right now, most mineral owners that are sitting atop gas fields are wishing it was oil. Many of us have leases where one well was drilled and the operator is just waiting for better prices. As long as those operators have “oil” options, you can expect most of the gas fields to sit idle. If you’re in the Marcellus, parts of the Eagle Ford, or the Granite Wash, you are still seeing good levels of activity, but the bulk of gas fields are relatively idle until better gas prices return.
…Chesapeake Energy is the best example of the three companies, and helps explain why there is some hope for an improvement in natural gas prices.
Chesapeake is the most active driller in the United States with 170 rigs operating. I’d like to show you how they have allocated, and how they will be allocating the capital expenditure budget between natural gas and oil drilling.
- 2008 – 13% towards liquids, 87% towards natural gas
- 2009 – 10% towards liquids, 90% towards natural gas
- 2010 – 30% towards liquids, 70% towards natural gas
- 2011 – 50% towards liquids, 50% towards natural gas
- 2012 – 75% towards liquids, 25% towards natural gas
Chesapeake has pretty much finished doing the drilling of natural gas properties that needs to be done to secure lease rights or “Hold by production.” Now they can allocate the capital to where it generates the highest returns, and that is obviously oil and liquids plays.
When the most active drilling in the country cuts its natural gas spending from 90% of its budget to 25% it is going to greatly slow down the pace of natural gas development. And it obviously isn’t just these three companies that are behaving like this. If you can allocated capital to oil instead of natural gas these days, you do it — it is a no-brainer. And for those purely natural gas-focused companies, they have less cash to develop natural gas properties, which should further curb supply.
Read the full news article at seekingalpha.com