Thursday, December 31, 2009

[Top 10] #1: Corporate Strategy Shift to Domestic Natural Gas

To me, the most interesting story this year in the Haynesville Play is the rather dramatic shift of corporate business plans to focus on domestic natural gas, specifically shale gas. The year began with Chesapeake Energy inking big deals with foreign producers to help fund its shale ambitions, but it ended with Exxon buying XTO Energy.

The Exxon/XTO deal will get lots of attention because Exxon is the biggest of the big daddies and because it is very much outside of Exxon’s character to make big corporate acquisitions. Given its size, for Exxon to be interested in pursuing an opportunity, it has to be big. It seems as though Exxon has identified shale gas plays as a “manufacturing” opportunity where the company can put huge amounts of capital to work to extract a significant return.

There are several companies out there that already are “suiciding” on particular shale formations (i.e. Petrohawk, Goodrich Petroleum), but more and more companies are changing their business plans to concentrate on domestic shale gas in general. This change in strategy comes at the expense of other business lines (like midstream), geographic diversification, corporate debt load and in some cases near-term profitability. Recently Devon announced that it is selling its international and Gulf of Mexico assets to focus on domestic production (the company has more than a half million leased acres in the Haynesville Shale). El Paso, too, is narrowing its focus on domestic gas production, so much so that it has stated plainly that it will outspend cash flow in the short-term.

This is important because it means that the large independent gas companies (and now Exxon) are further committing themselves to pour billions of dollars into producing areas like the Haynesville Shale. They are betting the futures of their companies on these big plays. Nobody has a crystal ball to say that these are the right decisions, but the continued high level of spending will give the Haynesville Shale the chance to blossom.

Ultimately, the Haynesville Shale will not be developed unless the E&P companies make the investment, and making the investment they most assuredly are. Spending is the key, and that’s why it is my #1 story for the year.

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