Lower gas prices reduce spending, slow production, and bring out problems in poorly constructed legal relationships

By Aaron Ball

Natural gas stocks are getting hammered.

Gas prices down to just $2.77 per MMBtu and some analysts predict a fall to $2.50 per MMBtu is possible.

Add to that the fact that the Marcellus is just about the only area in the country where break-even prices are below $4.00. 

It’s tough out there from a cash flow perspective, especially for companies who modeled their development on higher gas prices. This means look for reductions in capital expenditures and slowed production. Hopefully, this also means that prices will eventually rise and the market will sort out the problem. 

However, thinly capitalized companies, with more exposure to short term price swings, might not survive the pain of such an adjustment. This includes many “low cost” producers who charged into the Marcellus on peak prices. 

From a lawyer’s standpoint, these adjustments, shake outs, or whatever you wish to call them, have a way of bringing forth the flaws in old bargains to produce litigation.  Low-cost producers were attractive a year ago, but some of them, and their counterparties, acted with more expediency than common sense in crafting the legal aspects of their relationship. Unfortunately for those companies, this was a “pay less now versus pay much more later” scenario, with cash flow problems stemming from lower prices compounded by the distraction and expense of litigation.

It may be time to dust off those contracts.