Chesapeake Stalls Slide in Gas Prices With Cutbacks in Drilling

Chesapeake Energy Corp. (CHK), the second- biggest natural-gas producer in the U.S., accelerated an industry effort to cut back drilling to try to stop a price decline that saw gas slide to a 10-year low last week.

Gas prices, as well as producers’ shares, surged as much as 10 percent after the move by Oklahoma City-based Chesapeake, which accounts for 9 percent of U.S. gas output. The company’s plan to idle 24 natural-gas rigs by the second quarter is a 69 percent reduction from 2011.

The effect may be short-lived. An improving price is likely to encourage many producers to maintain or increase output, Michael Hall, an analyst with Robert W. Baird & Co., wrote in a note to clients.

“Excess supply, even after curtailments in production and activity, is likely to return quickly to the market in the event of a price recovery,” Hall wrote in a note to clients yesterday.

Chesapeake said it will cut spending on gas wells to $900 million this year from $3.1 billion in 2011.

Gas for February delivery rose 18.2 cents to settle at $2.525 per million British thermal units yesterday. Gas prices for next-month delivery had fallen 50 percent in the 12 months ending Jan. 20.

More Cuts Coming

How much the cuts will slow production and prop up prices in the short term depends on how many rivals also cut drilling, said Scott Hanold, a Minneapolis-based analyst for RBC Capital Markets.

“You’ll see more coming this quarter,” Hanold said in an interview.

Encana Corp. (ECA), Canada’s largest natural-gas producer, will reduce drilling in the Haynesville Shale, centered in Louisiana, by half this year, Ryder McRitchie, the Calgary-based company’s investor relations chief, said in a Jan. 19 investor conference call.

“Encana sees Haynesville Shale production down 20 percent this year, very bullish for natural gas if that’s right, ” Raymond Deacon, a Boston-based analyst for Brean Murray Carret & Co. said yesterday in an e-mail. “We are starting to see signs gas is putting in a floor.”

Ultra Petroleum Corp. (UPL), a gas producer that’s been moving into the Marcellus Shale, will reduce capital spending this year “significantly” from $1.4 billion in 2011, Kelly Whitley, head of investor relations for the Houston-based company, said yesterday in an interview.

‘Bare Minimum’ Drilling

Chesapeake will maintain its gas drilling at “bare minimum levels” until profits can compete with oil, Chesapeake Chairman and Chief Executive officer Aubrey McClendon said in yesterday’s statement.

Chesapeake’s output cut follows EQT Corp. (EQT)’s Jan. 20 announcement that it will suspend drilling in its Huron Field in Kentucky. Southwestern Energy Co. (SWN) Chief Executive Officer Steven Mueller said in a Jan. 5 interview his company may slow production in Arkansas’s Fayetteville Shale if prices stay low. Talisman Energy Inc. (TLM), a Calgary-based producer with acreage in the Marcellus, said Jan. 10 it will cut spending on drilling by $500 million, to just more than $4 billion this year.

Chesapeake rose 6.3 percent to close at $22.28 in New York. Southwestern Energy Co. rose 10.3 percent to close at $32.46; Ecana rose 7.4 percent to C$19.00 at the close in Toronto.

U.S. gas sales in 2011 rose by about 4.5 billion cubic feet a day, or 7.4 percent, the largest annual gain in history, according to the Energy Information Administration. Hydraulic fracturing, the practice of injecting water, sand and chemicals underground to release gas from shale-rock formations, has swelled available U.S. resources and production.

Weather, Pollution Rules

Other factors are contributing to low gas prices, including mild winter weather and postponement of new federal pollution rules that would have encouraged electric generators to use more gas, Teri Viswanath, director of commodity strategy BNP Paribas in Houston.

Some of the cuts in gas drilling may be offset as more companies, such as Chesapeake and EOG Resources Inc. (EOG) shift drilling to oil wells that also yield gas. The number of gas rigs fell to 780 on Jan. 20, a two-year low, according to Baker Hughes Inc. (BHI) The number of rigs drilling for oil jumped to 1,223, the most since Baker Hughes started counting oil and gas rigs separately in 1987.

In the oil-rich Eagle Ford Shale of Texas, a third of output, or 2.5 million cubic feet per well a day, may be gas, said Hanold, the RBC analyst. That compares to 15 million cubic feet a day produced by the typical Haynesville gas well, he said.

Joint Venture Infusions

Gas produced from oil wells probably accounts for about 10 percent of the roughly 75 billion cubic feet per day produced from onshore U.S. wells outside of Alaska, Hanold said.

Gas drilling also is being supported by a series of joint ventures in the industry that have brought more cash to producers to fund their operations, even at low prices.

Companies from Asia and Europe are buying stakes in shale fields and partnering with producers to gain knowledge they can use to develop shale formations in other parts of the world, Howard Gruenspecht, acting administrator for the U.S. Energy Information Administration said yesterday at a press conference in Washington.

“A lot of the world is very interested in this technology for shale production, and there’ve been a lot of buy-ins into shale gas producers,’ Gruenspecht said. ‘‘There’s gas, there’s liquids and there is knowledge that are driving the drilling business.”

Exxon Mobil Corp. (XOM) is the largest U.S. gas producer.

To contact the reporters on this story: Jim Polson in New York at jpolson@bloomberg.net; Mike Lee in Dallas at mlee326@bloomberg.net

To contact the editor responsible for this story: Susan Warren at susanwarren@bloomberg.net

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