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Majors May Hint on Future Direction of U.S. NatGas

The best financed explorers in North America -- ExxonMobil Corp., BP plc, Chevron Corp., Royal Dutch Shell plc and ConocoPhillips -- present their earnings results this week, with speculation about whether natural gas development will return to the agenda in a bigger way this year, with storage at record lows and more export projects drawing overseas contracts.

Few earnings surprises are expected, but as the big operators have transformed from gas explorers to oil development, the turnaround has impacted earnings -- and should continue to. BP likely will address the ongoing fallout from the Macondo disaster, while Shell on Wednesday should offer more detail of its sell-off plans in the U.S. onshore. Together with ExxonMobil and ConocoPhillips, the operators might provide insight into Russian sanctions; all five companies have significant holdings in the country.

The big oilfield service (OFS) contractors already have offered their results and their take on what to expect. The OFS providers expect to see stronger onshore exploration and production (E&P) spending this year and growth in the offshore. The contractors reported an unexpectedly big push for onshore and offshore newbuilds, and top-of-the-line drilling equipment.

BP, which has undergone the most intense remake since the 2010 well blowout, on Tuesday will be the first to provide its results. Trefis analysts will be "closely watching out for the net impact of asset disposals and new project start-ups completed by the company over the past several months on its upstream production. Apart from this, we will also be looking for an update on the ongoing trials in the U.S. courts associated with the 2010 oil spill incident," the Macondo well blowout. Trefis has a $48/share price estimate on BP, almost inline with its current market price.

"BP has changed a lot over the last few years, primarily due to divestments made by the company in order to fund charges associated with the 2010 oil spill fiasco. By the end of last year, the company had completed divestments of around $38 billion. A majority of these asset sales primarily included upstream installations, pipelines and wells, while the company has managed to retain most of its (90%) proven reserves. This has led to a sharp decline in BP’s production volumes over the last three years. The volume of total hydrocarbons produced by the group fell by almost 21% since 2010 to 2.256 million boe/d in 2013."

BP, less weighted to unconventionals but the biggest gas marketer in North America, likely will tout its growing strength in the Gulf of Mexico's deepwater, where it's now running a record nine rigs. Shell should offer more insight into its pullback from the onshore -- but also growing operations offshore. ExxonMobil, the largest U.S. gas producer, might be the key to whether gas production will expand this year.

Standard & Poor's Ratings Services (S&P) doesn't see much enthusiasm about gas growth from domestic E&Ps. Primary credit analyst Marc D. Bromberg said the winter rallied gas prices early, but there's not a lot of cheering for the long-term pricing prospects given the growth from associated gas from oil and natural gas liquids (NGL) drilling.

"The vast majority of our E&P issuers have crude acreage in their reserve base, and we expect that the development of these reserves should continue to drive stable credit protection measures through the end of this year and into 2015," Bromberg said.

"We expect that a vast majority of drilling rigs will continue to focus on crude prospects and that a majority of dry gas or NGL production will simply be a byproduct of crude-targeted programs." Gas production growth this year should help to replenish gas in storage. "As a result, we think that gas prices are likely to remain relatively flat from current levels."

Analysts with Tudor, Pickering, Holt & Co. Inc. (TPH) are expecting to see a lot of variability in the quarterlies, given the winter weather impacts, and the wide range of differentials in the Permian (wider) and Bakken (tighter). Stronger natural gas liquids prices and the big Northeast gas premiums also should make the highlight reel.

TPH is paying close attention to results from several plays, including not only the Permian, but the Utica and Tuscaloosa Marine shales and the south-central part of Oklahoma, where the Mississippian Lime and Woodford Shale intersect. Analysts also expect to see "green shoots commentary on gas rig adds, while new completions and tighter downspacing in a number of plays are likely to get air time."

The 1Q2014 announcements to date (Cabot Oil & Gas Corp., EQT Corp. among them) appear indicative of consensus ending on long/overweight onshore and short/underweight offshore trading, TPH said. U.S. land has had an "unbelievably strong run," with "lots of good news baked in and not reacting to upward revisions."

The offshore providers also are seeing a "whiff of good news," with Diamond Offshore boosted by contracts for older rigs and a resilient jackup market. National Oilwell Varco Inc. reported on Monday that orders in the offshore declined from 4Q2013 through 1Q2014, but business should escalate into the next quarter.

"From an investing time horizon," TPH analysts said it "feels early to jump onboard the offshore rig recovery story, given the length of time before we see the market healing," because demand needs to be higher and supply needs to be lower. "For land, maybe we get a buyable pullback after not wanting to chase."

Wells Fargo Securities LLC's energy and utility team said so far, most of the North American land comments have "tracked generally inline" to the analysts' views and those by most E&P investors.

"Addressing 2014, OFS comments suggest that service pricing (ex-Permian) likely remains flattish through year-end in product lines most important to well cost, and the focus remains on driving the mix of 24-hour work higher. This goal along with numerous data points...lends support to the view that best of breed E&P operators have begun the transition to a manufacturing phase defined by ongoing efficiency gains and optimizations."

The 24-hour statistics say it all, said Wells Fargo analysts. Baker Hughes now is near 60%, a 5% sequential gain, and it's targeting 70% by year's end. Schlumberger is at 82%, with 90% on term contracts.

"Operators have frequently touted the benefits of reduced cluster spacing and higher sand volumes, and they are following through as Halliburton stated stage density is up 25% year/year (y/y) in the Eagle Ford and Marcellus, and average completion volumes have increased 30% y/y.

"Additionally, service firms growing interest in artificial lift...highlights the immense demand from operators to optimize production and increase end recoveries..." The Utica and Mexico in early reports have been "on the edge of the radar," but Wells Fargo expects Mexico activity to gain more E&P interest through 2015 as the country emerges as a source of natural gas demand and possibly supplies.

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