Five Oil and Gas Companies Cutting Capital Spending for 2012
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Several exploration and production companies announced reductions in capital spending on oil and gas development during second quarter of 2012 earnings season. While this trend might cause a further weakening of the North American drilling cycle, it will eventually lead to reduced supply and an increase in prices.
CAPEX Cuts
National Fuel Gas (NYSE: NFG), which conducts its exploration and production operations as Seneca Resources Corporation, is involved in a joint venture with EOG Resources (NYSE: EOG) to develop properties in the Marcellus Shale. The company reported that EOG Resources does not plan to participate in the minimum number of wells specified in the joint venture agreement for 2012.
National Fuel Gas expects this decision to lead to almost no drilling and completion activity inside of the joint venture in fiscal 2013 (begins 10/1/2012), and a reduction of $50 million in capital spending in the fiscal year. The company also trimmed its production guidance from a range of 92 to 105 Bcfe, down from the previous guidance of 100 to 115 Bcfe.
EQT Corporation (NYSE: EQT) is also heavily involved in the development of the Marcellus Shale and plans to drill 132 wells in 2012 into this formation. The company has refined its capital program and now expects to achieve this goal with $65 million lower spending during the year. EQT Corporation is not drilling fewer wells or seeing a reduction in drilling costs and has reduced spending by being more selective on the location of the wells on its acreage.
Marathon Oil (NYSE: MRO) received a lot of attention from investors when it reported earnings for the second quarter of 2012 as the company announced a reduction in onshore drilling in various shale oil plays in the United States. The company plans to drop nine operated rigs, including two in the Eagle Ford Shale, three in the Bakken and four in the Woodford Shale as its looks to reconcile lower commodity prices with high drilling costs.
Despite the decrease in activity, Marathon Oil is not lowering overall capital spending in 2012, as the company will use the funds saved to build out infrastructure in the Eagle Ford Shale and meet required financial obligations on wells that it is involved with on a non-operated basis.
One important point for investors to consider is that although Marathon Oil is dropping rigs, the company has become more efficient in its drilling operations and expects to meet previous guidance on production growth. Marathon Oil estimates that oil and gas production in 2012 will grow 5% over 2011, excluding Libya, and then accelerate to a range between 6% and 8% in 2013.
Bill Barrett Corporation (NYSE: BBG) is also seeing reduced cash flow due to lower prices for natural gas and natural gas liquids and is reducing capital expenditures by $40 million in 2012 and $100 million in 2013 to match this lower cash flow. The company is ending all development activity at the Gibson Gulch project in the Piceance Basin, where it has approximately 18,000 gross acres under lease. Bill Barrett Corporation's original plan called for a two rig program in this area in 2012 as the company touted a 48% rate of return on wells here in a June 2012 investment presentation.
Balanced Market
Less capital spending by the oil and gas industry will eventually lead to less production and correct the imbalances in supply and demand that has plagued the natural gas market over the last few years. More actions like these are needed for the cycle to correct and commodity prices to recover.
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