In respone to Donna's question on a different thread, two of the most significant reasons so many people in the oilfield are being laid off or are less busy include:

Short Answer - lower prices, Wall Street expectations reduce activity and need for workers

Long Answer:

1) Lower prices received for oil and gas

This is the most important issue. As it relates to this website, the "Haynesville Shale" was first drilled into/through and "discovered" many years ago, while geologists hunted for conventional (primarily sand) prospects. However, without today's technology, the shale yielded very little to no oil and gas, much less "commercial quantities" of it. Once technology improved, and the cost of the technology was added to the economic evaluation of shale prospecting, the net revenue (gas price less costs, which have not come down as much as prices) had/has to get to a certain level in order for a company to consider it worth the investment/risk/time to pursue. Some companies have a lower net revenue minimum than others, depending on other opportunities in their inventory, expertise, acreage position and cost, risk tolerance and other reasons.

When the price of gas last rose about $7/MCF to $12+/MCF, it became economic (and very competitive at the upper end) to prospect the shale (and companies were receiving "expert" projections that prices would not be below $8/MCF in the forseeable future). When prices recently dropped below most companies' net revenue minimum, drilling slowed significantly and less people were needed. In addition, less leasing occurred as companies not only reduced spending, they have their hands full drilling existing leases [anyone seen the comment "In the Haynesville (570k net acres), DVN's (Devon's) . . running only 2 rigs can't develop even 5% of their acreage in a reasonable timeframe." Tudor Pickering 2/9/09]. Even though companies want to "protect their investment" and monitize it, forcasted future natural gas prices look so bad that many of their projects appear uneconomic through the period of time the wells would be produced. And right now, if you are drilling uneconomic wells, Wall Street will whup your stock (see below).

So why are some companies drilling few Haynesville wells?
a) need cash flow to service debt, including Haynesville lease cost debt of the last 2 years
b) taking a big risk that net revenues of the projects will increase (prices and costs have to cooperate)
c) maintaining their investment in the play - the leases - until drillable or saleable (again, risky)
d) lower lease cost basis improves economics - many companies had acreage held by production from other zones when the Haynesville Shale became famous
e) best available prospect in inventory (Buck's second paragraph on prior thread says it well)
f) other reasons that won't wait until dinner

Excellent daily "Energy Thoughts" newsletter from Tudor Pickering Holt and Company (http://www.tudorpickering.com) often speaks of current significant supply stockpiles, which is causing lower demand and thus, lower prices. With the economic downturn, many high demand users need less oil & gas because their business is not as good. Makes sense.

2) "don't spend more money this year than you expect to make" - Wall Street

"Keep your powder dry" - it's Wall Street's latest unspoken directive to oil & gas E&P companies. For E&P companies planning to spend more money looking for and producing oil and gas in 2009 than they expect to receive in revenue during 2009, their stock prices have been/will be hurt more than under the same scenario in the past. Wall Street assumes that companies not operating within expected cash flow are taking too much price risk in the current uncertain economy. Wall Street is stressing fiscal discipline, believing that the price of oil and gas could go even lower than it is now. Very very risky to be opportunistic.

In the Haynesville Shale trend, many companies incurred significant debt to purchase (relatively) expensive leases whose economics depended on gas being found (mechanically, more risky, and geologically, less risky) and sold for $8/thousand feet (MCF) or more. When the net revenue expected to be received are under companies' economic thresholds, they can't drill and produce them without the risk that their debt situation will multiply drastically, because they are servicing their past debts with much less cash flow than expected.

Hope this helps - be blessed!

Tags: Street, Wall, prices

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