August 19, 2011 / 6:35 PM / 7 years ago

BUY OR SELL-Natural gas cos: cash-strapped but asset-rich?

* Spending growth exceeds production increase...

* ... long-term production potential seen as a plus

By Vaishnavi Bala and Swetha Gopinath

BANGALORE, Aug 19 (Reuters) - Debt-heavy, natural gas-weighted companies are selling off assets to raise the cash they need to meet higher forecast capital spending, though there’s no corresponding increase in their production outlook.

Faced with rising costs and scarce funds, companies such as Quicksilver Resources and Range Resources say selling acreage is necessary to unlock money to spend on drilling for more oil CLc1 LCOc1.

Shares of Quicksilver, Ultra Petroleum and Cimarex Energy have been hit after the cash-strapped companies had to raise their capex forecasts.

“These (gas-focused exploration and production) companies tend to spend more than they generate. It’s a question of how much more,” said Imperial Capital analyst Michael Jones.

Some other analysts say natural gas producers, which have attracted investment from Carl Icahn to Wilbur Ross, can merely divest non-core properties with lower rates of return to re-invest in assets that should prove more lucrative.


Quicksilver’s market value is down 31 percent in the past month, as the company — which has about enough cash and equivalents to buy a used car — has raised its full-year spending view by 45 percent.

“Capital requirements of the Barnett, its core play, appear to exceed the returns it generates,” said Lazard analyst Eric Hagen, who has a ‘sell’ rating on the stock.

The Barnett shale formation in north Texas’ Fort Worth Basin is Quicksilver’s biggest cash generator.

Analysts have raised concerns about some companies’ long-term growth ability, as future output would come only from expensive new wells.

Shares in Range Resources, which has a healthier balance sheet, have dropped 9 percent in the last month. But it has to contend with fears that rising spending will outstrip cashflow.

“In 2011, we project Range spends $1.38 billion versus $726 million in discretionary cashflow ... an unsustainable trend if natural gas prices remain at current levels,” Hagen said.

At $4-$4.50 per million British thermal units (mBtu), gas prices NGc1 have been checked as the latest drilling techniques spur production activity in shale fields.

UBS Investment Research analysts reckon natural gas prices need to increase to $5.50-$6.00 per mBtu to justify the huge cost of tapping into shale gas.

A depressed gas market, and subpoenas from U.S. securities regulators seeking information on reserves, have added to producers’ woes.


“Range Resources is one of the best operating companies out there, and certainly at the top of the list in the Marcellus,” said MKM Partners analyst Curtis Trimble, who rates the stock ‘neutral’.

Morningstar analyst Mark Hanson, who has a ‘conviction buy’ on Range, backs that view. “You’re looking at a company that controls close to 1 million net acres that gives them more than 20 years of drilling activity,” he said.

Range Resources has said it can be self-funding by 2013.

Quicksilver’s dented cash position does not unduly worry some.

“Overspending capex and costs are not friendly to them, so it’s hard for them to manage ... but I think they will,” said analyst Michael Jones at Imperial Capital.

Trimble said he does not see gas prices declining much further, but does see a substantial downside to crude oil.

“On that basis, natural gas producers could be in a stronger position than companies more levered to crude oil,” he said. (Reporting by Vaishnavi Bala and Swetha Gopinath in Bangalore, Editing by Ian Geoghegan)

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