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Onshore Oil Shales Push Rig Forecasts Higher

With the onshore oil rig count "on fire," Raymond James & Associates Inc. on Monday raised its U.S. onshore rig forecast for 2011 by 3% and initiated a 2012 forecast that is 9% higher year/year (y/y).

"The U.S. drilling market has clearly transitioned to oil-related activity over the past few years," wrote analyst J. Marshall Adkins. "We expect this trend to continue for the next several years. In just the past six months, the U.S. oil rig count spiked 200 rigs to nearly 900 (up 30%)!"

Last September Raymond James analysts modeled the U.S. rig count "growing at half this rate," said Adkins.

"High oil prices and improved recovery technologies are driving increased activity in oil plays everywhere," he said. The Permian Basin alone has added almost 100 rigs over the past six months.

"Given our strong oil price forecast, we expect the oil rig counts in virtually all plays -- horizontal and vertical -- to continue to expand. In fact, we believe the primary constraint for the oil rig count will be how quickly the industry can add incremental horizontal rigs (conservatively, 100 newbuilds in 2011 and another 100 in 2012)."

The total domestic onshore rig count for 2011 now is expected to average 1,801, which is 3% higher than last September's forecast.

"This represents a y/y oil rig increase of 337 rigs (or 57%) and a y/y gas rig decline of 78 rigs (or 8%)," Adkins wrote. In 2012 the rig count is expected to jump 9% from 2011 to 1,970, which includes 1,191 oil rigs (up 28% y/y).

In general the onshore gas rig count is falling. Raymond James' revised 2011 forecast puts gas rigs down around 65, or 8%, to 865, and the new 2012 forecast is down 11% y/y to 772 rigs. "Gas supply is growing too fast with 800 rigs," said Adkins.

Until recently the U.S. gas rig count had remained "stubbornly high," and in fact had peaked at almost 1,000 rigs in late 2010, he noted. However, in the past six months around 100 gas rigs have been taken down; the count now sits at around 885.

Producers are dropping gas rigs in both horizontal and vertical plays -- except the Marcellus and Eagle Ford shales, he said.

According to a Raymond James analysis, around 75-100 gas rigs have been dropped in the past six months in dry gas shale basins, partially offset by the 50 total rigs added to the Marcellus and Eagle Ford plays.

The Marcellus Shale's close proximity to the "premium Northeast market makes the play very economical in a $4.00/Mcf gas world," while the Eagle Ford has a "strong liquid content," making it more dependent on oil prices, Adkins noted.

"Since the start of 2010 these plays have jumped from 100 rigs to 250 rigs, a 150-rig increase...Going forward these two plays will find it much easier to add incremental rigs than the older plays will be able to shed them." The "principal constraint will be rig supply."

Notably, the rig count in "legacy" shale plays, like the Barnett and the Haynesville, now appears to have "stabilized over the past few months at around 120 rigs," which is only 30 rigs off the high, said Adkins.

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