Despite a slow, steady increase in the price of natural gas over the past four months, the fuel is still selling well below levels comfortable for both larger companies and state coffers.
But for smaller operators with little overhead and even less debt, today's natural gas price environment presents great opportunities.
“When the prices go up, so do the costs of drilling,” oil and natural gas producer Pete Brown said. “High prices don't necessarily help us. You can make money at lower prices because service company costs come down.”
Brown is a co-owner in both Oklahoma City-based Cimarron Production Co. and Kingfisher-based operator Brown and Borelli Inc.
“When we drill in a low-price environment, we generally come out OK because our costs are lower,” he said. “If you drill when prices are down, they will inevitably go up later, and you can take advantage of that.”
One reason Brown and his companies have been able to survive and grow with lower natural gas prices is that they do not operate with debt.
“In 1982 when the price collapsed all of a sudden and Penn Square Bank collapsed, we didn't owe any money,” Brown said. “So we bought a lot of properties from those bankrupt companies.”
His philosophy hasn't changed over the past 30 years.
“We're in a very good cash position,” he said. “I don't wish bad things to happen to anybody, but if things like that happen again, I'm going to be standing as a buyer. It's important to be in this position in a downturn.”
Brown also has relatively low costs.
Besides himself and two co-owners, Brown's companies employ only seven clerical and accounting staff members. Everyone else is contracted.
Brown also benefits from a balanced portfolio, with wells that produce natural gas, natural gas liquids and oil.
For much of the past decade, most of Brown's profits came from natural gas. Over the past year, however, oil and natural gas liquids have outpaced dry natural gas.
“Gas is an integral part of our economics and always will be. We don't shy away from that because we always know we're going to be able to sell it,” he said. “Over the years we've seen booms and busts. We've seen gas over $12 and lower than $1. If you're in this business for long, you have to understand that and know you will have to ride them out.”
Despite the opportunities, low prices still present challenges.
“Most independents like myself have to seek partners,” he said. “In downturns, some of those partners are not as interested in investing. It makes it more difficult to come up with the money to drill a well.
Still, Brown said he can wait out the industry cycle.
“I'm not overly worried because we've been here before. One thing we know for sure is that prices are going to go up and they're going to go down. We just can't always predict how far or when.”
The pricing game
The price of natural gas settled at $2.87 per thousand cubic feet on Thursday, up 2 cents on the day.
A year ago, natural gas traded at $4.61. The price bottomed out at $1.90 on April 20 and has steadily increased since.
“The primary reason we've seen a rise in prices is that we've had a lot of summer heat,” said Tony Say, president of Oklahoma City-based Clearwater Enterprises. “June once again was one of the hottest Junes ever reported. That creates a lot of electricity demand and natural gas demand.”
Over the few weeks, however, the price appears to have stalled, holding between $2.50 and $2.90.
“The market is acting like it has a glass ceiling and a glass floor,” said George Taubel, president of Oklahoma Energy Services Inc. in Tulsa. “We don't seem to be able to penetrate below $2.50 or above $3. We have ping-pong days where we'll sell off one day and build back the next for no apparent reason.”
The country's natural gas producers last week added 39 billion cubic feet to storage levels, about half of the amount of the five-year average and well below one year ago, when about 90 billion cubic feet was inserted into storage.
While high temperatures have spurred the demand for electricity, low natural gas prices and political pressure have enticed many utilities to use the clean-burning fuel instead of coal.
“We've seen an incredible amount of fuel switching,” Say said. “We're also seeing a lot of older coal plants retiring, and what's taking that place is natural gas-generated facilities.”
While the demand for natural gas has slowly increased, production has dropped as fewer companies are searching for dry natural gas wells, instead favoring production in areas with higher levels of oil and natural gas liquids.
Relatively strong oil prices have helped balance out the low price of natural gas. Still, production and revenues have dropped in Oklahoma.
Producers paid the state more than $430 million in gross production taxes in fiscal year 2012, which ended June 30. The amount was down almost 12 percent because of lower prices.
A significant change in the price is not expected soon.
“I think natural gas prices will probably stay between $2.65 and $2.90 as storage numbers start coming in,” Say said.
When the prices go up, so do the costs of drilling. High prices don't necessarily help us. You can make money at lower prices because service company costs come down.”