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Gas Drilling: 'Meaningfully Higher' in 2010?

Considering a decline in service costs, acreage leasehold expirations, an increase in oil drilling and the anticipation of higher natural gas prices, U.S. rig count assumptions for 2010 weren't optimistic enough, energy analysts said last week.

On Friday Baker Hughes. Inc. (BHI) reported that the domestic rig count increased to 1,282, an 11-month high. According to BHI, the gas rig count gained 22 more rigs to total 833 on Friday, which was the highest gas rig count since March 20, 2009.

Separately, however, Schlumberger Ltd. CEO Andrew Gould told analysts Friday that the North American gas market holds uncertainties until at least the winter heating season has ended (see related story).

In their Stat of the Week, Ray James & Associates Inc. analysts J. Marshall Adkins, John Freeman, James M. Rollyson and John Fitzgerald said North American drilling activity should be "meaningfully higher in 2010, just maybe not as high as some in the industry anticipate."

These improved activity levels, however, "are still well below the robust rig count levels seen in 2008, and North American service companies are still not likely to see the same level of pricing leverage as during the prior cycle," wrote the analysts. "Likewise, constrained cost increases should leave U.S. E&Ps [exploration and production] in a position where they can make attractive returns and grow overall U.S. gas supply in a $5 gas world."

Over the coming months, "attractive natural gas economics" that are driven by horizontal drilling and better completion techniques "should allow the U.S. to grow gas supply and balance the gas market with about 1,000 active natural gas rigs," said Adkins and his colleagues.

According to the Raymond James analysts, the U.S. rig count has rebounded more than 40% to 1,248 rigs currently since it bottomed below 900 rigs last June. Natural gas-related activity "has started to pick up considerably, having climbed over 800 (up 22% from the bottom to 811) for the first time since April 2009."

The gas drilling rig count still is close to its lowest percentage of the total rig count in the past 10 years, noted Adkins and the team. "However, most domestic drilling is still focused on natural gas." In their last rig count updated last October, the gas rig count "has increased another 8% following the path of front-month futures natural gas prices, which have climbed close to $6.00/Mcf (up from $4.50/Mcf at 10/16/09) and are currently hovering around $5.70/Mcf.

"We expect the seasonal demand from the winter to keep prices, and thus the rig count, elevated throughout the first half of 2010. As the seasonal demand wanes, we believe the rig count will continue moving higher."

Raymond James' new estimate for gas drilling is to "bounce 55% off the bottom to roughly 1,050 rigs by the second half of 2010," said the team. "This rig count should be more than sufficient to grow U.S. gas supply in 2011...However, as shut-in gas wells are reopened, uncompleted gas wells are completed, and gas supply from the additional rigs takes effect, expect gas prices to drift lower through 2010. Such a retrenchment in U.S. natural gas prices should force drilling activity to level out in the second half of 2010 and beyond."

Tudor, Pickering & Holt Co. (TPH) analysts said last week most of the increase in drilling activity for the week ending Friday (Jan. 15) was driven by gas-directed activity by publicly traded E&P companies.

According to TPH's Weekly Rig Roundup, RigData reported a gain of 33 rigs for the week ending Jan. 15, while Smith Bits recorded 30 more rigs and Baker Hughes Inc. said there were 27 new rigs.

"The majority of [the] increase was driven by gas-directed activity (plus 25 rigs), while the oil-directed rig count declined by nine rigs," the TPH report said. "Public E&Ps again drove the week/week uptick (plus 23 rigs versus privates' plus-10 rigs), with the largest increases among publics" coming from Anadarko Petroleum Corp., XTO Energy Inc. and EnCana Corp.

The "gassier regions" showed the most rig gains, TPH noted, with East Texas/North Louisiana up by eight rigs; the Northeast adding six rigs, and the Rockies and North Texas adding four rigs each. Canadian activity also increased last week by 35 rigs to 520 total,. noted TPH. "Activity is 47 rigs (10%) higher compared to the corresponding week in 2009," the report said.

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