The credit quality of the US oil and natural gas sector should remain relatively stable through 2011 and into 2012, Standard Poor's Ratings Services said Monday.
"Robust" oil prices will benefit producers that are focused on oil and natural gas liquids, but dry gas prices "are still weak," credit analyst Thomas Watters said in a report.
Gas rigs in the recent past have "largely exhibited inelastic behavior to declining prices, and a balancing of supply and demand remains elusive," he said.
Production economics and cash costs "have taken a back seat" to the continuing need to drill and thereby hold onto production leases, joint venture agreements, and favorable producer hedges, Watters said.
In addition, a significant backlog of drilled, but not yet completed, wells will continue to put downward pressure on gas prices, he added.
The forward strip price of less than $5.00/Mcf is "an uneconomic threshold for a meaningful amount of production, the analyst said.
But "US gas prices could increase if existing favorable price hedges roll off, he said, adding that if drilling declines meaningfully, prices could rise in the latter half of 2012.
"Barring a recession, the confluence of these factors could re-establish the relationship between gas prices and rig count and ultimately lead to a reduction in natural gas inventories, thus increasing prices," he said.
S&P, like Platts, is a division of The McGraw-Hill Companies.
