More Drilling Budgets Heading Down

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First, we got Chesapeake Energy's (NYSE: CHK) cautionary cut. Then we saw Petrohawk Energy (NYSE: HK) and SandRidge Energy paring back. Now a few more E&Ps are reporting budget cuts in the face of sagging natural gas prices and tight credit.

On Monday, PetroQuest Energy (NYSE: PQ) provided an expansive status update. Like Devon Energy (NYSE: DVN), XTO Energy (NYSE: XTO) or practically any other producer with Gulf Coast operations, storm damage will prevent the firm from reaching its production targets.

Industrywide, these Mother Nature-imposed curtailments are providing a modest cushion to falling natural gas prices. But gas producers are going a step further and dialing back their drilling. Petroquest -- a neighbor of partners Chesapeake and BP in Oklahoma's Woodford shale -- is slowing its leasing activity there, and pulling a rig out of service sometime this month.

As for the future, Petroquest says it's focusing on funding its drilling out of operating cash flow. This may seem like a no-brainer, but E&Ps will spend well beyond their cash flow when funding is abundant and they're feeling flush. Dependence on debt just won't cut it in this environment. That's one more factor weighing in favor of diminished drilling budgets.

Range Resources (NYSE: RRC) appears to be on the same page in that regard. While the company didn't release a capital budget today, it did say that 2009 spending should match estimated cash flow. Given that 60% of production is hedged, Range's cash flow projections are probably more solid than most.

I should point out that not everyone is running for cover. Remember Anadarko Petroleum's (NYSE: APC) bright idea of buying back $5 billion of its own shares? Well, the company has already finished off the first phase, reducing debt as well. After all that, the company is still positioned to talk about an expanded 2009 capital program. Anadarko appears to be very strongly positioned here, and it remains one of my favorite E&P names.