Smaller shale gas producers have been battered by low prices for the fuel and more tough times are ahead as costs rise, likely forcing many companies to make expensive forays into oil exploration and sell assets.
NYMEX natural gas futures through the end of the year show prices hovering around $4.50 per million British thermal units, a level some analysts believe is too low for most producers to earn profits in many U.S. fields.
Analysts at UBS investment research estimate that natural gas prices need to be around $5.50-$6.00 to justify tapping into the shale gas fields that likely hold massive quantities of the fuel.
Quarterly natural gas prices at benchmark Henry Hub have not averaged above $6 per Mcf in over two years.
That has put many natural gas producers in a bind. They must spend heavily to increase their output and show Wall Street that they are growing, even though the fuel's price doesn't pay them back enough to cover their expenditures.
Many of the companies, such as Southwestern Energy, Petrohawk Energy, Cabot Oil & Gas and Range Resources, have been running negative cash flows, which forces them to issue new shares, take on debt, or find buyers and partners to help pay for drilling.
"The minute they have cash it burns a hole in their pocket; they go and lease more acreage and drill more. It's all the same business model," said Oppenheimer & Co analyst Fadel Gheit.
"Investors should be smart and be able figure this out, but they don't seem to be bothered by that," he added.
In the first quarter, Southwestern Energy posted negative net cash flow of $119 million, Petrohawk reported a negative $341 million, and Goodrich Petroleum showed a negative $83 million.
Cabot Oil & Gas's net cash flow was negative $107 mil-lion, Range's net cash flow was negative $131 million. EXCO Resources and Pioneer Natural Resources both posted positive free cash flow, but they were lifted by assets sales or joint venture deals.
Many of these companies are shifting operations to areas where the gas has a high liquids content, or even oil. Natural gas liquids and crude both fetch a higher price than gas, but drilling those wells, which require hydraulic fracturing and other technologies, is expensive.
It could take as many as six years for demand for natural gas to catch up with supply and cause a rebound in prices, said Subash Chandra, analyst with Jefferies & Co.
"In our view, the next few years look pretty grim," Chandra said.
He noted several companies, such as Houston-based Goodrich Petroleum Corp., which has a market capitalization of $654 million, are spending more exploration dollars on the search for crude oil and liquids-rich gas, an effort in which the company is making some slow progress.
