Chesapeake Energy cuts natural gas output

Matt Daily - Reuters - Jan. 23, 20112

Chesapeake Energy Corp. (CHK-N22.331.376.54%), the second-largest U.S. natural gas producer, will cut its daily output by 8 per cent per day in the first major move by the energy industry to try to stem a selloff that has pushed prices of the fuel (NG-FT2.550.219.01%) to decade lows. That cut of about half a billion cubic feet per day, and the company’s plans to slow drilling in some regions, helped lift natural gas prices and share prices of some gas-focused peers. Natural gas prices had tumbled by more than 20 per cent this year through the end of last week, but they jumped more than 5 per cent on the Nymex on Monday. The company’s move on its own was unlikely to have a sustained impact on natural gas prices, but could trigger similar moves from other producers.

“Half a [billion cubic feet] a day is probably not meaningful,” said Kenneth Carroll, analyst with Johnson Rice & Co. “I think you’ll have more cuts, but they’ll be measured ... I don’t think there will be any wholesale cuts at this time.”

U.S. natural gas output has soared to record levels as the energy industry has plowed billions of dollars into developing shale rock fields that were once too difficult and expensive to tap. The advent of hydraulic fracturing, or fracking, over the past decade has opened up those vast fields to drillers, but has created a glut of supply that has depressed prices and now made some of those fields uneconomical. “An exceptionally mild winter to date has pressured U.S. natural gas prices to levels below our prior expectations and below levels that are economically attractive for developing dry gas plays in the U.S., shale or otherwise,” chief executive officer Aubrey McClendon said in a statement.

Chesapeake shares rallied as much as 8 per cent on Monday, helping lift prices of gas-heavy peers including Cabot Oil & Gas Corp. (COG-N65.364.246.94%), Range Resources Corp. (RRC-N59.195.179.57%) and Devon Energy Corp. (DVN-N65.452.163.40%) Chesapeake, whose current gas production of 6.3 billion cubic feet per day is about 9 per cent of the nation’s total of 67 bcf, said it was prepared to cut off another half a billion cubic feet of output in addition to Monday’s reduction if prices did not rebound. Chesapeake and other energy companies have shifted drilling activity from “dry gas” fields to those that are “liquids-rich,” meaning they contain oil or natural gas liquids such as propane, butane or ethane, whose prices are based on those of crude oil (CL-FT99.901.571.60%). Chesapeake said it would trim the number of rigs drilling at dry gas fields to about 24 by the second quarter from 47 currently in use, or about one-third the level it averaged last year.

Its production cuts in Louisiana’s Haynesville and Texas’ Barnett shale should mean lower overall U.S. natural gas production in 2012 than in 2011, Chesapeake said. Those two fields have together accounted for virtually all of the 14 bcf increase in U.S. production over the past five years, the company said. Chesapeake’s spending on dry gas fields will fall 70 per cent to $900-million (U.S.), it said, as it reduces the number of drilling rigs operating in the Barnett and Haynesville shales and in Pennsylvania’s Marcellus shale. On Friday, its smaller peer EQT Corp. (EQT-N50.083.788.16%) said it had suspended drilling in the Huron basin indefinitely because of the low gas prices. The move would not affect the company’s goal of cutting its net debt to $9.5-billion by the end of 2012, Mr. McClendon said.

Still, even though the industry is focusing on the liquids-rich fields, those wells produce some dry gas, which will continue to build supplies, one market expert said. “This isn’t a decrease in production, it’s a deceleration in the future increase,” said Jason Schenker, president of Prestige Economics LLC in Austin, Texas.