Unless they're selling rock salt, commodity producers have to be prepared for huge price swings. The best of these companies maintain a lean cost profile, often hedge production to lock in cash flows, and keep their heads down during rough spots. We're in just such a spot right now, with natural gas having pulled back about 50% in two months' time.
While investors are panicking a little bit, I noticed several companies on Tuesday simply going about their business and investing for the long term. I think we can all learn from their temperament.
First we heard from Range Resources (NYSE:RRC), a real dynamo with the drillbit. This unsung S&P 500 inhabitant is an unconventional gas aficionado, targeting tight gas, shale gas, and coalbed methane (CBM) resource plays. Range Resources is one of the lowest-cost operators in the gas game, with a breakeven rate well below today's sagging gas prices.
The company has a major presence in Appalachia's Marcellus Shale, which is in the very early stages of exploitation. Even Chesapeake Energy (NYSE:CHK), which holds 1.6 million acres in the play, is just now drilling its first wells in northeast Pennsylvania.
Thanks in part to a timely partnership with MarkWest Energy Partners (NYSE:MWE), Range is ripping into this new play ahead of schedule. Production initially expected in the first quarter of 2009 has now been pulled into 2008. It's encouraging to see that infrastructure constraints aren't weighing too heavily on the pace of development here, given industry chatter about water disposal and other permitting issues.
Two more company developments are worth a mention. Denbury Resources (NYSE:DNR), which most assuredly is not drowning, just exercised an option to acquire a mature oil property from Venoco (NYSE:VQ). Denbury's modus operandi is to buy these old codgers, flood them with CO2, and coax out extra oil at a low cost. This is further evidence that it is business as usual for this rather unusual oil player.
Finally, in a sign of faith in its development program, Quicksilver Resources (NYSE:KWK) increased its 2008 capital budget. Sure, part of the spending rise was a strategic move to secure steel pipe ahead of a perceived industry shortage, but Quicksilver is also accelerating its Barnett Shale program in Texas.
The strong operators in this business are clearly unshaken. Stick with them, and you ought to come out of this correction relatively unscathed.
