Credit quality for natural gas producers, with some exceptions, will remain steady in 2011, Standard and Poor's Ratings Services said, with producers buffered against low gas prices by favorable hedging portfolios and their diversification into oil and natural gas liquids production.
"Except for exploration and production issuers that have a high exposure to natural gas, solid pricing for oil and NGLs should provide a buffer against weakening gas prices," S&P said.
(Standard & Poor's, like Platts, is owned by The McGraw-Hill Companies.)
Regarding gas production and prices in 2011, S&P, in contrast was gloomy. Prices will probably keep declining as producers have no incentive to stop drilling.
"Improved productivity due to more efficient drilling techniques, strong hedge books, and drilling to hold leases have also combined to sustain production and increase rig counts," S&P's primary credit analyst for the oil and gas sector, Tom Watters, said.
"A balancing of supply and demand remains elusive and an eye toward production economics and cash costs among producers is currently almost nonexistent given the continued need to drill to hold acreage by production, drilling to satisfy joint venture agreements, and because of favorable producer hedge books," Watters added.
A correction in the current overproduction of gas and lower prices will not come until pricey hedges expire and the need to hold acres by production falls off, Waters said. "At which point production discipline will begin to play out and alleviate high natural gas inventories," he said.
While S&P does not see many gas producers running into credit problems in 2011, it sees 2011 as a banner year for onshore drilling and service companies. The field companies are fully employed by the producers who keep drilling past market signals to stop, S&P said, and they have been able to pass price increases along to their customers, particularly for high-demand services such as the pressure pumping horsepower needed to drill and fracture increasing longer horizontal laterals in shale plays.
The service sector will be meaningfully split into onshore and offshore subsections with onshore service companies in far better situation than their offshore peers, S&P said. Offshore service providers face uncertain demand because of the slowdown in the US issuing new drilling permits for the Gulf of Mexico as wells as increased competition for newly built rigs arriving in the market, S&P said.
"For 2011, we believe the general trends in the industry equate to a rather stable outlook currently," S&P said. "Despite low gas prices, many gas producers are locked into favorable hedges, and those with a mixed hydrocarbon profile will benefit from healthy oil and NGL prices."
