Rising gas prices buoy companies still loaded with dry assets

The shackles of natural gas have begun to lighten for some of the companies that count on it most.

Natural gas spot prices crested the $4-per-million-British-thermal-units mark last month, roughly double its low point from last spring. That can't singlehandedly rescue the companies most dependent on gas, but as company earnings show, it has at least made gas less of a drag.

Chesapeake Energy Corp., the second-largest domestic producer of natural gas, yesterday reported $183 million in profits for the first quarter of 2013. The firm is continuing its transition, begun a year ago, from buying land to developing it and from drilling natural gas to producing oil and natural gas liquids.

The Marcellus Shale may have missed the memo. Average daily production in the dry-gas section was up 70 percent compared to this quarter last year, Chesapeake said. Only curbs in other gas plays kept overall production from growing.

"As natural gas prices have recovered from last year's historically low levels, the company has benefited from the strong growth and returns in both the northern dry gas and the southern wet gas portions of the play," the company said in a release.


Chesapeake plans to use caution in 2013, however, keeping its Marcellus rig count stable for the rest of the year. It is also selling "noncore" parts of its Marcellus acreage, such as a $93 million sale to Southwestern Energy Co. on Monday.

U.S. natural gas markets were rocked by oversupply last year, forcing producers into unsavory choices. Some took a loss by continuing to produce, some severely curbed gas production, and others began a pricey and painful transition to oil and liquids.

Now, as natural gas prices recover, the lowest-cost sources of gas -- reaped by the lowest-cost producers -- may be the ones to act first.

Cabot Oil & Gas Corp. reported profits of $42.8 million for the first quarter, compared to $18.3 million in the same quarter last year. Gas accounts for 95 percent of the company's production, by volume.

"The company is indeed a stone's throw from being cash flow positive around $3.50/mcf Henry Hub prices," analysts at Bernstein Research, led by Bob Brackett, wrote last week.

Cabot should become cash-flow positive sometime this year, "a rare feat for a gas-leveraged company," the analysts said.

Range Resources Corp. set a quarterly production record in the first three months of this year. Oil and liquids volumes grew faster than those of natural gas, but gas still made up 79 percent of total production for the quarter.

"The record production was driven by the continued success of the Company's drilling program primarily in the Marcellus Shale," the company said last week.

Even at current prices, Range has continued to drill gas wells in the Marcellus. In its northern sections, which trend toward dry gas, it drilled seven wells in the first quarter and plans to drill another 15 this year.

Like other firms, Range has used a hedging program to cope with roller-coaster gas prices. For 2013 so far, that has allowed Range to sell gas for an average of $4.09 per thousand cubic feet.

In a research note published last month, Bernstein analysts said not to be surprised if the Marcellus leads the charge into the new natural gas world.

If gas stays around $4/Mcf for the long term, they wrote, "we believe that the Marcellus [S]hale will make higher-cost basins in the U.S. unnecessary."

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