Gas driller to cut state outlays 40%

Southwestern Energy Co., the main driller operating in the Fayetteville Shale, has announced plans to cut spending in Arkansas by 40 percent this year.

The company said this week it expects to spend $560 million in the Fayetteville Shale in 2015, down from $944 million in 2014 -- mirroring other oil and gas producers that are lowering capital expenditures in response to an oversupplied market and weak commodity prices.

"It's part of the general industry slowdown," said James Williams, an energy analyst who operates WTRG Economics near Russellville. "Natural gas prices are lower; crude oil prices are lower -- that means revenue is lower, so companies are going to generally cut back on their drilling budgets."

Southwestern Energy plans to reduce its total capital investments from $2.4 billion in 2014 to a projected $2 billion in 2015. The Houston-based company initially said in December it expected to spend $2.6 billion this year.

"As we enter 2015, our industry is experiencing reductions in commodity prices," said Bill Way, Southwestern's chief operating officer, during a conference call with analysts Friday. "As is customary practice for us here at [Southwestern Energy], maintaining our financial discipline and investing is core to creating value ... for our shareholders."

Southwestern Energy announced its revised capital spending plan when it released its 2014 fourth-quarter financial results Thursday afternoon.

The company reported a profit of $185 million, or 52 cents per share, during the period that ended Dec. 31, compared with $188 million, or 54 cents per share, during the same quarter a year ago.

Southwestern Energy shares fell 4.8 percent to close Friday at $25.08 on the New York Stock Exchange.

Energy companies have been gutting their capital spending plans for 2015 in response to weak oil prices. Murphy Oil Corp. of El Dorado recently said it plans to spend 33 percent less than it did in 2014.

During the U.S. shale boom, energy companies were pumping out record amounts of crude from formations across the country, largely contributing to a glut in the global oil market.

Crude prices plunged more than 50 percent when the market became oversupplied with oil and demand declined with a weakening economy.

On Thanksgiving Day, the Organization of the Petroleum Exporting Countries decided to retain its production levels. Analysts have said OPEC refused to cut its crude output to maintain its share of the market and to curtail production from U.S. shale plays.

Energy producers are quickly idling drilling rigs in response to market supply and prices. The nationwide drilling rig count is down 28 percent from a year ago. That includes a 16 percent drop in rigs drilling natural gas wells.

With the "rig counts we are seeing, it's not much of a surprise," said Phil Flynn, an energy analyst with Price Futures Group, about Southwestern Energy's plans to cut capital spending.

"It's a sign that Southwestern is concerned about the shale because of oversupply," Flynn said. "It is an older part of the story."

Drilling activity in the Fayetteville Shale in north-central Arkansas has slumped in the past three years as a result of prolonged low natural-gas prices.

Flynn said other areas in the country -- such as the Marcellus and Eagle Ford shales -- are being explored by companies where "perhaps they are able to do it a little cheaper right now."

There are now only nine drilling rigs in the Fayetteville formation, compared with 60 in 2008 when exploration in the shale peaked.

The three main companies operating in the state have been transferring rigs to other shale formations containing oil and natural gas liquids, such as ethane and butane, because they are more profitable than the dry gas found in the Fayetteville formation.

Southwestern Energy is the main driller in the Fayetteville Shale. XTO Energy Inc., a subsidiary of Exxon Mobil Corp., has only one rig in the formation, and BHP Billiton Ltd. has none.

Australian-based BHP Billiton said in October it was going to sell its Fayetteville Shale assets, which the company bought in 2011. BHP Billiton said this week the assets had been taken off of the market.

"We have concluded the marketing of our Fayetteville acreage and have decided to retain it within our portfolio to maximize value," the company said in a recent financial report.

"The longer-term development of the Fayetteville remains an attractive option and with the majority of our acreage held by production, we will continue to defer investment for value, consistent with our long0tem outlook for gas prices," BHP Billiton said.

The initial announcement by BHP Billiton, one of the world's largest mining companies, to attempt to sell its Fayetteville assets followed years of weak natural gas prices and the company's decision to spin off several of its metals and mining assets into a new company in order to improve its productivity.

BHP Billiton expects to spend $3.4 billion instead of $4 billion on U.S. onshore drilling and exploration in 2015 and will reduce its rig count from 26 to 16. A recent report showed BHP Billiton had zero rigs in the Fayetteville Shale.

Analysts say they expect both oil and natural gas prices to rebound in the second half of 2015 as the glut in both markets subsides.

And with the recovery in prices should come a rallying in shale exploration -- even by Southwestern Energy in the Fayetteville formation, they said.

"It's not like they've abandoned the Fayetteville Shale," Williams said. "They dropped with the price, and they will come back with the price."

Business on 02/28/2015

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