Analyst expects more companies to follow Chesapeake’s lead

Energy companies likely will ramp down production of natural gas because of low prices and constrained storage space, following the lead of Chesapeake Energy, a BNP Paribas analyst said.

The Oklahoma City-based company said Monday it will cut production and reduce spending in gas fields by 70 percent after prices hit a 10-year low last week. Chesapeake said it will immediately cut output by 500 million cubic feet a day and idle half its rigs, and is prepared to cut daily output by up to 1 billion cubic feet.

BNP Paribas analyst Teri Viswanath said more companies will need to take similar proactive measures to keep natural gas economical viable and create the necessary storage space for future production.

“You are going to have to see more than just Chesapeake,” she said. “For us to balance this market, other producers are going to have to take some proactive measures.”

Viswanath said a mild winter contributed to drop in demand and constrained storage facilities, and as a result, prices have dwindled below $2.50 per million British thermal units.

Chesapeake Energy CEO Aubrey K. McClendon said the mild winter sent prices below the company’s expectations and below levels that made drilling economically attractive.

McClendon called on other companies to also cut output to combat sinking prices and constrained storage hubs.

“Having led the industry in natural gas production growth over the past 10 and five years, we recognize the need to demonstrate leadership and take action now in order to protect value for our shareholders.”

Chesapeake has been shifting its focus to fields with oil and natural gas liquids. In the Barnett Shale in North Texas, which mostly produces a less-valuable “dry” gas,” production has been slowly declining.

Viswanath warns prices likely won’t be seeing a rebound in 2012.

“In light of the present requirement to maintain supplies within the confines of physical system constraints, we expect that this price recovery will now be delayed,” she said.

She predicted prices to average $2.70 per million Btu in 2012, but natural gas prices should start to edge up to $3.85 in 2013.

Either way, it’ll be an interesting few years for natural gas.