Poor natural gas. While there has been a major resurgence in oil, prices for its gassy friend have remained depressed. The market fundamentals are just that bad.
The saving grace for natural gas is that as producers back out of rig contracts with folks like Nabors Industries (NYSE: NBR ) and cut drilling campaigns, decline rates at existing wells will drag down supply. As noted by independent exploration and production companies like XTO Energy (NYSE: XTO ) , production declines ought to take a meaningful chunk out of industry volumes by the end of this year.
Everybody in the oil patch knows about this effect, and hence expects (hopes for?) a return to higher natural gas prices later this year or early in 2010. A mitigating factor that few seem to be talking about is the ever-growing efficiency of leading independents like Anadarko Petroleum (NYSE: APC ) .
For the latest quarter, Anadarko highlighted its lower spud-to-spud cycle times in the Wattenberg field, one of the company's best onshore assets. This has allowed the company to drill 32 more wells in the first half of 2009 compared with the same period in 2008, while using fewer rigs. Thanks to field-level improvements like this, Anadarko's quarterly natural gas production rose more than 2% from the previous quarter. While that's more subdued than the growth at curtailment-canceling Chesapeake Energy (NYSE: CHK ) , it's still the wrong direction for those banking on higher gas prices.
By being such efficient operators, exploration and production companies like Range Resources (NYSE: RRC ) and EOG Resources (NYSE: EOG ) are actually prolonging the downturn in natural gas. Eventually, decline rates will no doubt carry the day, but given the unwillingness of each individual company to really throttle back, near-term declines may not be as dramatic as is broadly expected. Government data on June withdrawals will show whether I'm way off base with this call.