Top Gas Producers Are Growing Liquids Production, Part II

by: Michael Filloon

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In the second part of a four-part series, I will identify five top United States natural gas producers and the progression of moving drilling rigs to liquids from natural gas plays. We are still in infancy with respect to this change, and it is very possible it could go on for years. At some point natural gas prices will firm, which will slow this transition. I do not see this happening in the short term. Natural gas plays with low costs or high natural gas liquids content will continue to produce as rigs in higher cost plays are moved to oily ones.

BP (NYSE:BP) is the sixth-largest producer of natural gas in the United States. From the second quarter of 2010 to the second quarter of 2011, it has decreased natural gas production by 18.2%. BP has the third-largest proved natural gas reserves here, behind Exxon Mobil (NYSE:XOM) and Chesapeake (NYSE:CHK). Year over year, BP has the same number of U.S. rigs in natural gas plays, with a total of 12.

It is the second-largest producer of U.S. liquids; Chevron (NYSE:CVX) is the largest. BP has decreased U.S. liquids production by 20% from the second quarter of 2010 to the present. BP has decreased its liquids-focused rigs to one from five as of January 2010. Its production decreased following the Deepwater Horizon accident, and it is not totally clear as to when BP will increase production to this level again. I would focus on BP's future, which is promising based on proved reserves. This company looks cheap on valuation.

ConocoPhillips (NYSE:COP) is the seventh-largest producer of natural gas in the United States. It has decreased natural gas production by 9.4% since the second quarter of 2010. It has increased its total number of natural gas rigs in the United States by 30% from 10 in January of last year to 13 at the end of the second quarter of 2011. ConocoPhillips has the fourth-largest proved U.S. natural gas reserves and the fourth largest U.S. liquids production. Year over year its quarterly liquids production increased 0.3%, but since the first quarter of 2011 liquids production increased by 5.2%.

ConocoPhillips has the third largest proved U.S. liquids reserves. It has increased the number of rigs drilling from 6 in January 2010 to 18 by September of this year. ConocoPhillips operations in the United States include the Eagle Ford, Williston Basin, Permian, and Alaska, to name a few. These are some of the best liquids plays in the lower 48 states. It has very good partners in Alaska, such as Exxon Mobil, BP, Chevron and Anadarko (NYSE:APC).

ConocoPhillips is changing its business. It is reducing cap ex to natural gas projects in North America, and plans to divesting some of its refineries. I think ConocoPhillips is moving in the right direction and is a good investment. It will be interested to see if it is able to sell some of its refining business. The large difference in the cost of feedstocks for refineries on the East Coast compared to the mid-continent is very large, and could continue this differential for years. The refineries companies want to sell in the east are not in high demand, given the cost of Brent.

Southwestern (NYSE:SWN) is the eighth-largest natural gas producer in the United States. It has increased this production by 25.1%. Southwestern has maintained it U.S. natural gas rig count at 16 from the beginning of 2010 to the present. This company has done an excellent job of keeping costs down. Southwestern has F&D costs of $1.02/Mcfe and cash operating costs of $1.30/Mcfe in 2010. Southwestern recently announced the planning of its first well in Lower Smackover Brown Dense Play. These 460,000 net acres are mostly in the oil part of the play. It also has possibilities in New Brunswick, where Stoney Creek could produce oil. I am not overly excited about this company. It is well hedged and maintains low costs, but it is still levered to natural gas.

Chevron is the ninth-largest U.S. natural gas producer. Since the second quarter of 2010, it has decreased this production by 1.4%. Since January of 2010, Chevron has doubled it number of rigs drilling for United States natural gas, but it only had one rig last year. At the end of last quarter, Chevron was the number one United States liquids producer. Year over year, it decreased liquids production by 2%. It passed BP for the top spot due to its 20% decrease in production. Chevron had five rigs drilling for U.S. liquids at the beginning of 2010. It has since decreased this number to four. Chevron is a very large producer in the Gulf of Mexico. As with BP, the moratorium on drilling until new guidelines are met, has decreased production. It is the number one producer in net-oil equivalent. Chevron has production in Alaska, Texas, Oklahoma and several other mid-continent states. In February of this year, Chevron purchased Atlas Energy and its 850000 acres in the Marcellus and Utica shale. Chevron is well placed, especially with an uncertain world economy. It is not a bad name to hide out in until economic improvements are seen.

Williams (NYSE:WMB) is the tenth-largest U.S. natural gas producer. From the second quarter of 2010 to the second quarter of 2011, it has increased U.S. natural gas production by 5.4%. Its number of U.S. gas rigs increased 21% since January of 2010. Over that time frame, its rigs increased from 14 to 17. Williams' U.S. natural gas production is much larger than its oil production. It recently entered the Williston Basin by making a $925 million purchase.

Outside of the United States, Williams also has acreage in oil dominated areas of Argentina. Williams also has some midstream assets, but most of these are owned by Williams Partners L.P. (NYSE:WPZ). It will be interesting to see what Williams will pay for other liquids assets. Its natural gas assets have a low cost structure. Williams has a position in the Marcellus, I would expect it would like to add acreage in this area.

The U.S. natural gas producers are trying to increase liquids production. BP seems to be recovering from the Deepwater Horizon accident, and should return as the top U.S. liquids producer soon. I think BP can be owned here. ConocoPhillips has also been affect in the Gulf of Mexico. It has been very active in acquiring U.S. land liquids assets, and should continue to improve its business through these plays.

Southwestern may have the lowest overall costs in U.S. natural gas producers. It is shifting to liquids, but not as much as I would like to see. Chevron is very appealing as it has moved ahead of BP in liquids production. It purchase of Atlas seems to be an excellent move as it now has one of the best positions in the Utica shale. Williams may have spent too much on its Williston Basin assets, but it looks as though it will continue to go after liquids. I would like to see Williams add more liquids acreage, and establish a much larger exploration and production footprint in the Marcellus.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: This article is not a buy recommendation, only information intended to inform investors of a trend in increasing liquids production.

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