It's finally happening. Gas producers are starting to crack.
With the natural gas to oil price ratio running at a nearly-unprecedented 21-to-1 ($86.80 per barrel for crude versus $4.12 per mcf for gas), gas producers are throwing in the towel and switching over to the "dark side" - Oil exploration.
Up until now, many die-hard gas producers had been sticking to their guns and continuing to drill gas. Particularly shale gas, where producers claimed economics are still attractive. Even at current depressed gas prices.
But times are changing. Last week reports emerged that gas-major Chesapeake Energy (NYSE:CHK) has leased 700,000 acres in the Rocky Mountains. The aim? Drilling for oil.
Chesapeake CEO Aubrey McClendon was quoted as saying bluntly, "The economics just compel you to look for oil rather than natural gas right now."
Elsewhere, other gas producers are making similar moves.
Last week, Texas-focused gas producer SandRidge Energy (NYSE:SD) announced a $1.5 billion dollar takeover of oil producer Arena Resources. This comes after SandRidge (SD) CEO Tom Ward recently admitted to analysts at a major energy conference that producers can make "10 times the money" drilling oil wells as opposed to natural gas.
Even shale plays are taking on a "wet" flavor. The Eagle Ford shale has become the darling play in America, with most analysts acknowledging its superior economics. The reason? Largely, the liquids that generally come along with gas from Eagle Ford wells. Which fetch oil-like prices (or better).
As gas producers continue to seek oil entry opportunities, there will be steady upward pressure on prices for oil assets (which have already appreciated significantly this year).
There may also come opportunities in purchasing unloved gas properties. But only for those companies with the foresight and financial fortitude to hold on for the months or years until prices turn.
There will be a select few winners from this game. Keep watching this space.
Author's Disclosure: No Positions