Chesapeake output cut boosts futures
BY DAN STRUMPF
NEW YORK -- Natural gas futures surged Monday after Chesapeake Energy Corp. announced it was curtailing production in response to low gas prices.
Market participants took the announcement as a sign that producers are starting to respond to the selloff that has gripped the gas market all winter. Mild temperatures coupled with relentless shale gas production have battered the market, with prices still off 15.5% in 2012 despite Monday's rally.
"An exceptionally mild winter to date has pressured U.S. natural gas prices to levels below our prior expectations and below levels that are economically attractive for developing dry gas plays in the U.S.," Chesapeake CEO Aubrey K. McClendon said in a statement.
Natural gas for February delivery settled up 18.2 cents, or 7.8%, at $2.525 a million British thermal units on the New York Mercantile Exchange. That's the highest settlement in more than a week.
Chesapeake said it will immediately curtail 0.5 billion cubic feet a day of gas production, reflecting about 8% of its total output. The company said it could cut production by another 0.5 bcf a day "if conditions warrant."
The company will also reduce dry gas drilling activity to approximately 24 rigs by the second quarter, down by nearly half from 47 dry gas rigs it currently has in use. Dry gas rigs produce only natural gas, as opposed to wet gas rigs which also produce more profitable liquids such as crude-oil.
To be sure, Chesapeake is just one producer out of many, and its immediate production cut affects less than 1% of total U.S. gas output of 80.1 billion cubic feet a day. But the move sends the signal that producers are willing to take steps to address the natural gas glut that has depressed prices for months, analysts said.
"The big question is, who's going to follow after Chesapeake?" said Phil Flynn, analyst at brokerage PFG Best in Chicago.
Despite Monday's rally, natural gas prices are down sharply this year. They are off 52% from this time a year ago and a far cry from their recent highs near $14/MMBtus reached in 2008.
Last week, gas prices fell as low as $2.322/MMBtu, the lowest settlement price in 10 years.
The decline has been fueled by a milder-than-normal winter that has curbed demand for gas-fired home and office heating, coupled with surging production. About half of U.S. homes are heated using natural gas, and prices typically climb during the winter months.
That hasn't happened this year. And with winter already half over and temperatures expected to remain elevated through February, many analysts say a meaningful pick-up in gas demand is unlikely.
"Production does have to be cut," said Pax Saunders, analyst at Gelber & Associates in Houston.
Still, there is no guarantee that additional production cuts are on the way. Producing natural gas in many regions is still cheap. Many gas wells also produce crude-oil and other liquids, which fetch much higher prices than gas and offset its rock-bottom price.
"Quite honestly, I think it's an overreaction to one group saying they're cutting production," said John Woods, head of the energy trading firm JJ Woods Associates. "I don't think everybody's going to shut production."
Another warning sign for supply emerged Monday: The U.S. Energy Information Administration cut its estimate for the amount of shale gas located in the U.S., saying it thinks there are about 480 trillion cubic feet of shale gas in the country, down from earlier estimates of 830 trillion cubic feet.
A reduction of estimates of the amount of gas in the Marcellus Shale formation was largely behind the revision. The formation stretches across Pennsylvania and New York.
Dow Jones Newswires
01/24/2012