HOUSTON (Reuters) - U.S. energy companies eyeing depressed natural gas prices are likely to trim capital spending in 2011, but cash generated by free-flowing debt markets and a shift of funds into oil exploration may help stave off big cuts.
Williams (WMB.N), a natural gas production and pipeline company, has said it will cut spending in 2011, citing low prices and lower margins for natural gas liquids like butane.
More companies are expected to follow after third-quarter results are released next month and 2010 winds down.
“I have to think that low gas prices are going to limit budgets,” Phil Weiss, an oil analyst at Argus Research, said. “I expect spending to go down.”
Drilling for shale gas in areas like the Haynesville Shale in Louisiana where the gas is “dry” or has a low liquids content has fallen out of vogue as natural gas prices hover around $4 per million British thermal units.
“Our Haynesville program in 2010 is over,” James Dearlove, chief executive of Penn Virginia Corp PVA.N, told an investor conference in New York last week. “Drilling dry gas in a $4.50 environment maybe isn’t the best thing to do with your money.”
Unprocessed natural gas out of the ground often contains liquid hydrocarbons that are not crude oil and can be processed and sold separately for a premium. Low gas prices have prompted a number of companies including Chesapeake Energy (CHK.N) and EOG Resources Inc (EOG.N) to ramp up drilling on acreage containing oil or gas that is “liquids rich.”
“It’s quite likely that you will see some guys that have an opportunity to redirect capital to higher-return, oilier projects taking advantage of that,” said Jim Byrne, an analyst at BMO Capital Markets.
Hefty supplies offer little hope for near-term recovery in gas prices. Futures traded on the New York Mercantile Exchange indicate natural gas will stay below $5 per million Btus until late next year.
Dave Roberts, head of exploration at Marathon Oil Corp (MRO.N), told investors that he sees nothing to suggest the U.S. natural gas market “is going to get better any time soon and maybe within the span of my career.”
Still, capital spending directed at drilling in areas known for liquids-rich gas like Wyoming’s Niobrara and South Texas’s Eagle Ford shale is expected to grow as companies aim to produce more profitable gas or oil, analysts said.
Companies will also continue to drill on acreage with leases that will expire if not drilled. The current U.S. rig count is bolstered by drilling on leases that need to be held by production, analysts and companies said.
Commercial banks are still reluctant to lend to oil and gas companies and the appetite for equity is not as robust, so energy companies, lured by low interest rates, have turned to high-yield debt markets to raise funds.
Those funds, analysts said, may be used to pay for oil and gas exploration.
“There has been a flood of debt, Subash Chandra, an analyst with Jefferies and Co, said. “Companies are not just refinancing debt, but they are raising more than they need.”
Exploration and production companies that have had debt offerings in recent weeks include Brigham Exploration Co BEXP.O, Linn Energy LINE.O and Anadarko Petroleum Corp APC.N.
Even if prices are low now, companies will want a pile of cash to tap when the market recovers.
“Our industry is really built on optimism,” Chandra said. “You tap whatever is available to you, to build at a future time.”
Reporting by Anna Driver; Editing by Steve Orlofsky