Moody’s: ‘Risk of a dry hole has fallen nearly to zero’

Strong capital markets and readily available financing have helped Independent oil and gas companies position themselves for unconventional resources plays, Moody’s said in a report issued Thursday.

“Robust capital markets have helped most independent E&P companies acquire leasehold positions and begin development of new unconventional resources plays,” Moody’s wrote, predicting that this sector will experience single-digit growth over the next 12 to 18 months.

Independent companies focused on crude and other liquids, versus natural gas, are expected to be the biggest winners of their investment in unconventional plays. New technologies continue to make drilling in these areas more profitable, allowing companies to access plays once thought prohibitively expensive.

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“Years of trial and error have removed much of the uncertainty,” Moody’s wrote. “The risk of drilling a dry hole has fallen nearly to zero, and E&P companies are developing a repeatable, manufacturing-style approach to unconventional resources.

Moody’s expects unconventional plays investment to continue to focus on liquids-rich areas, noting that companies with a larger portion of investment in natural gas, such as Chesapeake Energy and Encana, will see much lower returns, given the still relatively low price of natural gas, which closed Thursday on the New York Mercantile Exchange one month forward at $4.02 per million British thermal units.

But while financing has enabled companies to move into new areas, a lack of needed pipeline infrastructure will continue to hamper these companies from moving their products to end markets, Moody’s said. Investment in pipelines has improved delivery, but more is needed, and the expected shortfall in 2013 and 2014 will dampen production. For example, Continental Resources and Oasis Petroleum in the North Dakota Bakken Shale and Range Resources and Antero Resources in the Marcellus Shale plan for lower rates of production because of infrastructure issues.