Natural gas drilling boom extends to 'wet areas' [The Pittsburgh Tribune-Review]

Aug. 19--Natural gas drillers in Pennsylvania are becoming victims of their own success -- again.

When they ramped up production of gas from shale formations during recent years, they drove prices to 10-year lows, which was good for consumers but bad for company profits.

Pinched by those low prices, drillers began targeting fields such as Western Pennsylvania's Marcellus shale that are rich with higher-priced liquid byproducts -- ethane, propane and butane -- only to see the same story unfold. A growing glut of those liquid gases and falling prices have led to production cuts, cash-flow troubles for some firms and the potential for corporate takeovers, market experts said.

"The strong, more efficient (companies) will survive, and the high-cost, inefficient ones probably won't," said Gerry Goobie, managing consultant at the IHS Purvin & Gertz energy consulting branch in Calgary. "It really becomes a function of how good an operator are you. As in anything, some are much better than others."

The prices of natural gas, ethane, propane and butane hit 12-month lows in June. The price of propane fell by half from a high of $1.56 a gallon in September, and ethane plunged almost two-thirds from a high of 88 cents a gallon in October, according to Oil Price Information Service statistics.

Corporate bosses are correcting course, planning to slow down and drill more selectively. The time it takes to construct pipelines and plants needed to process liquid gases -- now happening north of Pittsburgh and in Ohio and West Virginia -- naturally slows the rush to a more sustainable pace, experts said.

"Producers are still a little gun-shy, given what happened with dry gas. The economics are pretty attractive for (liquid gases), but at the same time, I think producers are definitely wary of creating another glut," said Robert Bellinski, a stock analyst on the energy team at Morningstar.

"These guys are not dumb. The (exploration and production) companies are very concerned about cash flow because of what happened with natural gas. So to shoot themselves in the other foot, they're just unlikely to do that," Bellinski said.

The deep rock formations that interest drillers across the country contain diverse fuels. They range from nearly pure methane gas in northeast Pennsylvania's Marcellus shale to liquid gas fuels to oil in the Texas Eagle Ford shale and North Dakota's Bakken formation.

Company officials used to debate which was the better investment, as several companies pushed dry gas that could go into pipelines for manufacturing and home heating with minimal processing. The ensuing rush flooded the market with natural gas during the recent warm winter, dropping prices to a decade low of $1.90 per million Btu. The price has since rebounded to $2.75.

That led companies with cash needs -- such as Chesapeake Energy Corp. and Encana Corp., and others including Cecil-based Consol Energy Inc. and Downtown-based EQT Corp. -- to shift more focus to liquid-rich areas. Range Resources Inc., an early backer of liquid gases, like many companies wants to sell some assets to concentrate on those areas. Chesapeake sold billions of dollars worth of pipeline operations to help resolve a cash crunch.

With gas prices depressed, even for wet gas, asset sales likely will continue, experts said. One possible consequence of low prices is that banks will be less likely to lend money, forcing drillers into asset sales, experts said.

"Now all of a sudden everybody's going, 'Oh my gosh, what are we going to do?'" Goobie said. "All the money they thought they were going to make is not there because markets have adjusted accordingly."

Companies could be likely to let leases expire, especially shorter-term leases in dry gas areas. That has started to happen in Central Pennsylvania, Bellinski said. Companies might feel pressure to rush to drill before leases expire but likely only in liquid areas.

That's because even with the glut, liquids are a better business target, experts said. Gas that comes with liquid byproducts still can be worth as much as double the gas that comes without them, market analysts said.

Natural gasoline and butane are used almost like gasoline and sold at prices closer to oil's, steadily valued at more than $2 per gallon during the past year, according to Oil Price Information Service. Propane can be exported, which buoys its value, too, experts said.

Industry officials hope that a cold winter could increase short-term prices. In the long term, the ethane market, which suffered the worst hit among liquid gases, probably will stay soft for only three to four years, said Randy S. Nickerson, senior vice president and chief commercial officer at MarkWest Energy Partners LP, a leading processor of liquid gas in the Marcellus shale.

Petrochemical companies plan to build several plants to use ethane to make plastics, including one proposed in Beaver County, and that would increase demand when the plants start opening in 2015, Nickerson and several analysts said.

Independent drillers, especially private companies, that cannot or do not want to hold on that long could become takeover targets, experts said. Commodity prices this year are too low to get some companies the value they desire in order to sell, but slight rises and more stability in commodities could change that. Private companies could become willing sellers this year rather than risk heading into 2013 with uncertainty about the federal tax code, said Dave Pursell, managing director and head of securities at Tudor, Pickering, Holt & Co. in Houston.

"Nobody wants to be a seller at the bottom," Pursell said. "The companies who find themselves in a disadvantaged gas position are going to have to do something on the oil side.

"If it was easy, everybody would be doing it. (Now) you're going to separate those who 'can' from those who 'can't.'"

Timothy Puko is a staff writer for Trib Total Media. He can be reached at 412-320-7991 or tpuko@tribweb.com.

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