Cheap gas yields little mileage for U.S. economy

Houston-based natural gas producer to chop 1,100 jobs amid low prices and a warm winter

The decline of oil prices during the last two years has failed to deliver the economic benefits widely predicted, leaving experts scratching their heads.

The third-biggest independent U.S. natural gas producer plans to cut 1,100 jobs and has paused its drilling program as Appalachian gas wells remain unprofitable amid a pipeline bottleneck in the Marcellus Shale and a warm winter cutting into demand.

Southwestern Energy Co.’s move to shed more than 40 percent of its workforce comes months after gas prices fell below break-even levels in the remote Marcellus Shale, which suffers more than other gassy regions in the United States because of the vast oversupply and seasonally low level of demand in the Northeast.

The announcement shows natural gas-focused drillers are under as much pressure as their oil-centric counterparts, even though oil drillers have grabbed most of the financial headlines, with crude becoming a market barometer for global demand growth.

Gas prices sank 27 percent in the past year, and Southwestern’s “cash flow to fund projects will be significantly lower than it has been the past few years,” company spokeswoman Christina Fowler said in an email. “These organizational changes are required to maintain competitiveness in this low gas price environment.”

Southwestern, which declined to make its chief executive available for interview, expects a $60 million to $70 million pretax charge for severance payments and other costs. Of the 1,100 job cuts, 300 are located at the company’s Houston headquarters. It is unclear how many employees will remain in Houston after the job cuts because some employees may be moved to Houston from other regions. But the current payroll reductions and another smaller workforce cut in August, Southwestern said, will help it bring costs down by $150 million to $175 million.

Southwestern’s shares jumped $1.42 to $8.80 on the New York Stock Exchange as oil and natural gas prices rose

on Thursday.

The Houston company found viable gas resources in Arkansas’ Fayetteville Shale more than a decade ago, but by the end of 2014 the company shifted its gaze to the Appalachia region.

In a string of purchases, Southwestern snapped up 413,000 net acres in West Virginia and southwestern Pennsylvania from Chesapeake Energy Corp. and Statoil in late 2014 and early 2015 for about $5 billion.

It still had 888,000 net acres in the Fayetteville, and it expected its new growth to come from the Northeast.

But it takes natural gas prices of at least $3 per million British thermal units to break even on pricey wells in the Marcellus Shale in Pennsylvania, which has a bloated inventory of natural gas after the shale gas boom a few years ago, which eventually led to the terrific downfall of U.S. natural gas prices in 2011 and 2012.

U.S. gas settled at $2.14 per million British thermal units on Thursday and has averaged below $3 since January 2015. Southwestern hasn’t had any active rigs since mid-December and it hasn’t yet set its annual capital spending budget or figured out its operating plan. But companies in the Marcellus Shale are likely getting around $1 per unit because of its remoteness.

“There’s a price difference because of pipeline access, transportation costs — there is spare capacity on the pipelines but it’s fairly limited,” said Mark Hanson, an analyst at Morningstar.

The layoffs and the halt in drilling comes even though Southwestern has recently reported big gains in productivity in Marcellus Shale wells.

The company’s wells are pumping 60 percent more gas and drilling and completion costs have come down 20 percent, in part because oil field service companies have reduced equipment and service prices. Still, Southwestern lost $1.77 billion on a large asset impairment in the third quarter of 2015.

Southwestern is not in financial distress, but it broke with a historically conservative management style in its big bet on the Appalachian region, and likely wouldn’t have had to make such a hefty payroll cut if not for its aggressive acquisitions, Hanson said.

“If you’re not running rigs, you don’t keep an extra 1,100 people on,” Hanson said. “Anyone in the Marcellus is getting crushed.”

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Southwestern Energy Southwestern Energy fueled its growth with its operations in the Marcellus Shale, which because of its location, requires higher production costs than other natural gas fields.

Stephen Thornton / New York Times file Workers on a Southwestern Energy drilling rig near Wonderview, Ark., in 2014, the same year the company shifted its emphasis to the Marcellus Shale.