Tuesday, September 23, 2008

Low Natural Gas Prices for a While?

I was reading Chesapeake Energy's recent operational and financial update and was a little taken aback by some of what I read. The gist of the release is that Chesapeake is going to reduce its drilling capital budget by $3.2 billion through 2010. This is big. It comes as a result of the suddenly depressed price of natural gas, and Chesapeake probably won't be the last company to issue a statement that they are cutting back on near future drilling costs.

To me this indicates that the gas companies are actually a little scared about the price of natural gas going forward. All of this talk about over supply and lessened demand in the market might be more real than previously anticipated. In reading Chesapeake's statement, the company almost made it sound like getting natural gas into cars will be a necessity rather than a bonus.

Chesapeake is under pressure from Wall Street to reduce its debt to stabilize its stock price. To say that the company is going to spend billions on drilling when the price of natural gas is almost too low to make a profit on some of the wells puts Chesapeake in a bad position. This is going to be a tricky play for Chesapeake given the fact that the company has more than a half million acres (gross) of leased property that it has to drill to hold the leases by three to five years from now. It will make Wall Street happy in the short term, but it is still an open question for the long term.

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