If you have an ounce of contrarian in you, natural gas and natural gas producers have to be at least a little intriguing these days. Natural gas has now dipped well under the $3 mark, and it is very hard to believe that it can be sustainable long term at these levels. There aren't many natural gas wells being drilled today that are making any money.
If I were to start acquiring equities with considerable natural gas exposure today I would do so feeling quite certain that there would be some short term pain involved. I can't pick a bottom on anything and don't think anyone else can either.
I'm okay with short term pain if I feel comfortable that over the long term an investment will pan out. The trouble I have with getting excited about natural gas equities is that I'm not convinced that the current level of natural gas prices isn't going to stay with us for several more years. And while I'm patient, I don't relish the idea of suffering for several years. And several additional years of low prices might push some natural gas producers into financial trouble.
Here are the steps that Chesapeake is taking:
First, Chesapeake plans to further reduce its operated dry gas drilling activity by 50% to approximately 24 rigs by the 2012 second quarter from 47 dry gas rigs currently in use and by 67% from an average of approximately 75 dry gas rigs used during 2011.
Second, the company plans to immediately curtail approximately 0.5 billion cubic feet (BCF) per day, or 8%, of its current operated gross gas production of 6.3 bcf per day, which is about 9% of the nation's natural gas production. If conditions warrant, the company is prepared to double this production curtailment to as much as 1.0 bcf per day
Third, wherever possible, Chesapeake plans to defer completions of dry gas wells that have been drilled but not yet completed, and also plans to defer pipeline connections of dry gas wells that have already been completed.
Fourth, the company intends to reallocate the capital savings from reduced dry gas drilling, well completion and pipeline connection activities to its liquids-rich plays that offer superior returns in the current strong liquids price environment.
Fifth, Chesapeake plans to further reduce its undeveloped leasehold expenditures, the majority of which have been focused on liquids-rich plays during the past three years. The company is now targeting to invest approximately $1.4 billion in undeveloped leasehold expenditures in 2012 (net of joint venture partner reimbursements), of which approximately 90% will target liquids-rich plays and 100% will be in plays where the company is already active.
The first three steps are all actions that would help support natural gas prices in the short term. Steps four and five would offer some support longer term as these are investments that steer development capital away from natural gas.
Chesapeake, while a major natural gas producer, likely can't move the price of natural gas completely on its own, so hopefully other large producers will join in to try and support the price. Any producer who has the option to steer capital to oil and liquids projects has likely already started doing so.
The very steep recent selloff in natural gas can certainly be blamed on an extremely warm winter across all of North America. The longer term natural gas doldrums can obviously be blamed on the surge in natural gas supply from shale gas.
So what to do? I don't think the actions of Chesapeake are going to help all that much short term. Even if the price of natural gas did bounce, Chesapeake and other producers would just open up shut-in production and kill any rally.
Longer term I do think that the amount of capital being sucked away from natural gas drilling and into new unconventional oil plays will have an impact. And at some point prices have to at least rebound to a point where producers make a profit from drilling a new well.
I'm not ready to jump in yet, but I do think I could get interested in those pure natural gas producers who have the best balances sheets that would enable them to survive should natural gas prices stay low for an extended period. Another option is to invest in oil producers that have natural gas assets that could increase greatly in value should prices rebound (an example of which would be Sandridge Energy, SD).