<p>In a widely anticipated move, the Federal Open Market Committee agreed in December to raise the target for its key interest rate from zero to 0.25 percent to 0.25 to 0.5 percent. While this is hardly a major hike in rates, it marks the beginning of what is expected to be an ongoing process of tightening U.S. credit. The federal funds rate is the rate at which banks lend each other reserves, but essentially acts as a baseline for lending rates of all types.</p>
<p>Potentially rising borrowing costs couldn&rsquo;t come at a worse time for low to mid-level natural gas exploration and production companies already struggling in what has become a historically low-price environment. Internal rates of return in the even the most attractive U.S. shale plays have taken a serious hit over the past 12 months. Firms have responded by drastically cutting exploration and spending. The number of rigs actively exploring for new natural gas wells hit an all-time low in December. Some estimates point toward a decline in spending of more than 20 percent in 2016 following a decline of more than 30 percent in 2015, as the industry adjusts to reduced revenue.</p>
<p>Credit ratings of exploration and production firms have taken a hit and most have shifted out of growth mode. Larger producers are in a financial position and diversified well enough to withstand the unfavorable environment while smaller companies do not have this luxury. A number of bankruptcies has hit the industry in recent months. Now, with interest rates on the rise, taking on additional debt to maintain operations becomes a more expensive proposition, putting the industry into potentially serious trouble in 2016.</p>
<p>Efficiency gains and lower production costs have worked to keep overall output volumes elevated in 2015, but year-over-year growth was reduced significantly in the fourth quarter. Production could be poised to fall at least marginally in 2016, with unsupportive winter weather contributing to the lowest natural gas prices on record when accounting for inflation. If the industry is also faced with more bankruptcies or reduced operations over the next 12 months, production volumes could fall more dramatically than expected.</p>
<p>&nbsp;</p>
<table border="0" cellspacing="0" cellpadding="0" width="640">
<colgroup><col width="142"></col> <col width="148"></col> <col width="157"></col> <col width="144"></col> <col width="49"></col> </colgroup> 
<tbody>
<tr height="19">
<td class="xl66" width="142" height="19">Natural   Gas Prices ($/MMBtu)</td>
<td width="148"><br /></td>
<td width="157"><br /></td>
<td width="144"><br /></td>
<td width="49">&nbsp;</td>
</tr>
<tr height="19">
<td height="19">LOCATION</td>
<td class="xl65" align="right">December 27, 2015</td>
<td class="xl65" align="right">October 30, 2015</td>
<td class="xl65" align="right">December 28, 2014</td>
<td>&nbsp;</td>
</tr>
<tr height="19">
<td height="19">NYMEX</td>
<td class="xl67" align="right">1.77</td>
<td class="xl67" align="right">2.32</td>
<td align="right">3.144</td>
<td>&nbsp;</td>
</tr>
<tr height="19">
<td height="19">NNG Ventura</td>
<td class="xl67" align="right">1.79</td>
<td class="xl67" align="right">2.29</td>
<td class="xl67" align="right">3.47</td>
<td>&nbsp;</td>
</tr>
<tr height="19">
<td height="19">Calif. Citygate</td>
<td align="right">2.36</td>
<td class="xl67" align="right">2.20</td>
<td class="xl67" align="right">3.62</td>
<td>&nbsp;</td>
</tr>
</tbody>
</table>

2015/12/U_14515856377252_largethumb.

2015/12/U_14515856377252_thumb.

2015/12/U_14515856377252.

Natural gas exploration and production companies hit by potentially rising borrowing costs and lowered rates of return for shale plays by drastically cutting exploration and spending. Production could be poised to fall at least marginally this year. 

Commodities: Natural gas production may fall, at least marginally

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