Shale-Gas Boom May Stall as Price Slump Erodes Cash (Update 1)

By Edward Klump

April 23 (Bloomberg) -- Drilling in U.S. shale-gas formations may tumble as companies run short of cash after prices for the fuel languished below the cost of production for
more than a year.

Natural-gas explorers will realize the need to cut drilling in the next few months, said Murry Gerber, chairman of EQT
Corp., the largest producer in the Appalachian Basin. “I think
the rig count is going to come down, and then you’ll see the
production follow,” he said in a telephone interview.

U.S. gas output climbed the past four years, contributing to a glut, as drilling advances unlocked fuel-rich shale
formations from Louisiana to Pennsylvania. Gerber said producers
typically need prices of $6.50 to $7 per million British thermal
units to make a “reasonable” return. Gas hasn’t been that high
since December 2008 and traded below $4 this week.

“Investors have expressed, some of them at least, their concern about what appears to be an irrational resolve to continue drilling even while gas prices fall,” said Arthur
Berman, director of Labyrinth Consulting Services near Houston.
“I expect that that sentiment will perhaps become stronger.”

Baker Hughes Inc. today reported a 1.7 percent drop in the number of active U.S. gas rigs, the first decline since Dec. 25. The rig count reached a record 1,606 in September 2008, before
plunging as the recession dragged down gas prices and a collapse
in credit markets forced companies to slash drilling budgets.

Drilling Rebounds

Buttressed by revitalized capital markets, cash from asset sales and hedging contracts locking in higher prices, producers accelerated drilling in 2009’s second half. Even as prices for
the heating and power-plant fuel slid to a seven-year low in
September, the rig count climbed. It rose in 33 of the past 40
weeks. Before today’s report, the count had jumped 28 percent
this year.
    “It was kind of like people woke up and looked around and
said, ‘Gee, the world didn’t end,’” said Allen Brooks, a
managing director at Houston investment bank Parks Paton Hoepfl
& Brown.

XTO Energy Inc., the biggest U.S. gas producer, made such good bets on its hedging before prices slid that it was able to
raise at least $1.7 billion by settling contracts early.

James Halloran, a consultant at Financial America Securities in Cleveland, said that under some contracts with
landowners, producers risk losing leases if they don’t drill.
Gas prices will remain low “until somebody wakes up in this
whole thing and says, ‘I haven’t got any money, I can’t do this
anymore,’” he said.

EQT Drills More

EQT announced a stock sale in March to fund increased drilling.

“We wish we could just turn the gas on tomorrow and have it all come out when the prices are high and shut it all off when the prices are low, but that’s just not practical,” Gerber
said. He said that unlike most producers, Pittsburgh-based EQT
can keep drilling profitably at current prices, partly because
it acquired leases before land costs jumped.

After continuing to drill at money-losing prices to show investors gains in reserves and output, many producers won’t have enough cash to fund new wells at their recent pace, said
Berman of Labyrinth Consulting.
    Halliburton
Co., the world’s second-largest oilfield
contractor, said the “resiliency” of U.S. gas production may
keep prices low for several quarters. Producers are shifting
drilling to gas liquids and oil, Halliburton said.

Budget Pared

    “The current gas-pricing fundamentals don’t seem to support the degree of dry gas activity which is under way at the
moment,” Tim Probert,
president of global business lines at
Houston-based Halliburton, told investors on an April 19
conference call. “We certainly see that weakening.”

Petrohawk Energy Corp. said April 13 that it will cut its number of rigs in the Haynesville Shale of Louisiana and Texas
by 20 percent and increase drilling for more lucrative gas
liquids in South Texas. Houston-based Petrohawk also agreed to
sell a stake in its Haynesville pipelines for $875 million and
cut its capital budget by $100 million.

Joan Dunlap, vice president of investor relations at Petrohawk, declined to say at what gas price the company’s wells
can break even.

Shale joint ventures signed with major oil companies by such producers as Chesapeake Energy Corp. and Atlas Energy Inc.,
as well as the sale of XTO to Exxon Mobil Corp., may help slow
drilling, said Haag Sherman, chief investment officer at Salient
Partners in Houston.

Bigger Players

“I think you will see people cut back because you’re moving assets in the hands of stronger players, and I think the stronger players are going to be more disciplined about how they
allocate dollars,” said Sherman, who helps manage about $8.2
billion.

Royal Dutch Shell Plc, Europe’s largest oil company by market value, invested about $2.2 billion in onshore North
American gas projects last year. It had enough prospects to
spend $4 billion, said Marvin Odum,
Shell’s U.S. president.

“There’s somewhat of a self-correcting system here, right?” Odum said in a March 26 interview. “If the gas price doesn’t support the economics of drilling, then drilling’s going
to slow down.”

To contact the reporter on this story: Edward Klump in Houston at
popwSendEmail( this ))"">eklump@bloomberg.net.