Arkansans see lower gas bills; falling prices concern producers

As Arkansas consumers fret about higher commodity and pump prices, natural gas prices in the “Natural State” have fallen to the lowest levels since April 2002, according to newly released information from the U.S. Department of Energy.

According to the DOE’s Energy Information Administration, natural gas prices for residential consumers fell to a seven-year low in January of $9.80 per 1,000 cubic feet. In Arkansas, prices paid by local consumers fell even lower to $9.26 per 1,000 cubic feet.

When adjusted for inflation, Arkansas consumers haven’t had seen cheaper natural gas since April 2000 when the price was $6.50 per 1000 cubic feet.

Although good news for consumers, the overall decline in natural gas prices from the wellhead to the city gate is troubling news for U.S. natural gas producers – including those companies now operating in the Fayetteville Shale.

Earlier this week, UBS analyst William Featherton downgraded Fayetteville Shale leader Southwestern Energy from a “buy” rating to a “neutral” rating and lowered its target price to $44 a share, mainly due to expected lower natural gas production levels in 2011.

Featherton said Southwestern’s shares were fully valued after a recent stock market rally, trading at a 13% premium to peers in the oil and gas sector. However, the Wall Street analyst noted that the Houston-based natural gas operator’s output growth is slowing in the Fayetteville shale.

“While SWN historically boasted the strongest production growth profile within the resource plays, we now expect SWN to deliver 2011-2012 absolute (and debt adjusted) production growth roughly in line with peers as Fayetteville growth rate slows,” Featherton wrote in an April analyst note. “SWN is nearly 100% exposed to weak natural gas prices, and has hedged just 40% of 2011 volumes, below the gassy E&P average of 54%.”

In December, Southwestern announced a capital budget cut to $1.9 billion, down from nearly $2.1 billion in 2010.

“While we continue to believe that the long-term fundamentals for natural gas are very good, we are entering the New Year with gas prices at lower levels than what we saw at the beginning of 2010," Southwestern CEO Steve Mueller said. "Our 2011 capital program is flexible, and we have the ability to adjust as market conditions change throughout the year."

As part of that plan, Southwestern said it will start 2011 with 13 operated horizontal rigs in the Fayetteville Shale and exit the year drilling with 11 rigs. Still, Southwestern’s overall 2011 production is expected to be in a range of 465 to 475 Bcf equivalent, which is an increase of nearly 18 percent compared to 2010.

In 2010, total U.S. marketed natural gas production grew 4.4% from 59.7 billion cubic feet per day (Bcfd) in January to an estimated 63.8 Bcfd in December. However, the EIA’s recent short-term outlook noted that modest declines are expected through 2011 because of a falling gas-directed drilling rig count “in response to lower prices.”

In February, the Henry Hub spot price averaged $4.09 per million Btu (MMBtu) in February 2011, 40 cents per MMBtu less than the average spot price in January 2011. The EIA forecasts the Henry Hub spot price to average $4.10 per MMBtu in 2011, a drop of 29 cents per MMBtu from the 2010 average. EIA expects the natural gas market to begin to tighten in 2012, with the Henry Hub spot price increasing to an average of $4.58 per MMBtu.

In response, the U.S. rig count since April 2010 has dropped from 973 to 906 rigs as of Feb. 25.

“The large price difference between petroleum liquids and natural gas on an energy-equivalent basis contributes to an expected shift towards drilling for liquids rather than for dry gas,” The EIA said in its March 8 forecast.

Overall, natural gas prices in Thursday’s session fell to the lowest levels in three weeks as spring weather weakens demands. The current month contract for natural gas fell by 21 cents, from $4.35 per MMBtu to $4.14 per MMBtu at the New York Mercantile Exchange.