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Texas Acquisition Shows Shift of Gas Producers to Oil Investment

SandRidge Energy’s agreement this week to acquire Arena Resources, a producer of conventional oil in West Texas, for $1.6 billion is the latest example of natural gas companies seeking to balance their portfolios with more oil as the two resources decouple in price.

Natural gas prices have fallen more than 25% this year to below $4 a million British thermal units while oil prices have risen 8% and are now testing the $85 a barrel level, with some analysts forecasting $90 to $100 a barrel for later this year. The price ratio between the two fossil fuels has widened to more than 20-to-1 after staying closer to 10-to-1 in the past, even when oil rose to $147 a barrel.

SandRidge CEO Tom Ward said last month at the Howard Weil Energy Conference that companies can make “10 times more money” producing oil rather than gas. SandRidge has been acquiring oil properties over the past two years to achieve greater balance.

Gas accounted for 85% of SandRidge revenue at end-2008. Currently, oil represents only 28% of production but accounts for 54% of revenue.

The Arena Resources acquisition is SandRidge’s second in West Texas since November, when it spent $800 million to acquire properties from Forest Oil.

Other producers at the Howard Weil conference – including Noble Energy and Cabot Oil & Gas – said they were shifting investment to oil rather than gas.

And last week, Aubrey McLendon, CEO of Chesapeake Energy, which derives 90% of its revenue from natural gas, said at another energy conference that today's economics “just compel you to look for oil.”

Chesapeake is investing in an oil exploration and development project in the Rocky Mountains and hopes eventually to get a 50-50 balance in oil and gas production, McLendon said. The project in the Rockies consists of 700,000 acres in the Powder River Basin in Wyoming with an unidentified partner.

Natural gas prices have fallen as Chesapeake and others have invested heavily in production of shale gas. The companies now want to diversify to be better balanced even if the price equation shifts again.

McClendon said that using the horizontal drilling techniques pioneered in shale gas for oil production in the Granite Wash has revived that play and was bringing Chesapeake returns of 100 to 150%.

He said the company made a big mistake by not pursuing oil drilling in the Bakken Shale of North Dakota and Montana, where horizontal drilling techniques have been very successful.

By. Darrell Delamaide




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