Natural Gas Companies Keep Drilling Despite Dropping Prices

The oil gas industry forges ahead with drilling without letting lower prices intervene. 12 more rigs went up in the U.S. and currently drill for natural gas bringing the total to 905 rigs according to Baker Hughes Inc.

Natural gas prices dropped 14 percent by the end of February from the start of this year. Currently, prices are below $5 per million British thermal units (BTUs). Successful shale plays won't be able to survive this amount, but obviously they believe it will turn around if they continue drilling and spending. Chesapeake Energy Corp, EOG Resources Inc. and Southwestern Energy Co. gas companies saw a hit on profits. It also doesn't help that service providers are increasing their prices due to a bigger demand for drilling rigs. This further puts a squeeze on producers' profits.

Unlike previous years when oilfield drilling and production companies cut spending and drilling whenever the price of natural gas dropped, the oil gas companies are doing the opposite by increased capital spending and drilling activity. But if the $5 per million BTUs doesn't change, the companies may have to adjust their strategy.

Having a colder winter was a good thing for the oil gas industry. The cold weather increased demand for natural gas and helped cut the natural gas surplus. The stockpile led to the prices dropping. The current gas inventory is almost 4 percent below last year's levels. Another thing is the unemployment rate being lower than the original forecast for February. Because of this, the oil and gas industry believe it will boost demand for natural gas.

A Forbes article contains an interview with Advisors Asset Management Chief Investment Strategist Matt Lloyd. "We are bullishly biased with natural gas for the long term. As we see the demand for oil rise in the economic recovery, alternative uses for natural gas will increase. Though currently it may be a value play, we can see this transform itself into a momentum play in 2011. We would not be surprised to see a modest increase in price by the end, say 15% or roughly 5.50 level," he says.

In the same article, Muhlenkamp and Company Founder Ron Muhlenkamp says, "Don't bet on the price of natural gas; bet on the companies that are able to produce a high volume of it."

Natural gas should have a longer-term value especially since natural gas could replace oil's market share in the U.S. according to R.W. Roge and Co. CEO Ron Roge.