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Bleak Outlook for Wet Gas Drillers Through 2013

July 2, 2012
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For drillers of any stripe it's looking dark until the second half of 2014, energy analysts with Raymond James & Associates Inc. said last week. A "meaningful rebound" isn't likely until the second half of 2014 and through 2015, they wrote in a note to clients.

The domestic oil and gas rig count is forecast to drop through 2013, with wet gas drilling joining oil and gas operators on the sidelines, said J. Marshall Adkins and his colleagues. They offered a pessimistic forecast for oil drillers last month (see NGI, June 25).

Even with the big shift from onshore natural gas plays to liquids targets, there are still an estimated 560 gas-directed drilling rigs, with roughly one-third drilling for dry gas.

"This component of the rig count has fallen at a dramatic pace with a more than 40% decrease year to date," said the analysts. "Given the over supplied gas market, we expect these rigs to continue to drift lower, albeit at a slower pace than we have seen thus far. By year-end 2013 we still think the dry gas rig count will fall from its current level of 182 rigs to 100 rigs."

That puts the analysts' total U.S. onshore rig count estimate at roughly 1,100 rigs by the end of 2013 from a current level of about 1,421.

However, the "more important and glaring change is our expectation for decreases in the wet gas rig count," said Adkins. "While wet gas has held up better as a result of higher oil prices, it too has taken a licking, but we don't think it will keep on ticking. With crude oil coming down, natural gas liquids (NGL) pricing should follow suit and should fall meaningfully faster as many wet gas plays are more marginally economic when compared to oil.

"Specifically we expect the wet gas count to fall from 359 rigs active today to roughly 270 rigs by year-end 2013." The "lion's share of these rigs are dispersed in some of today's largest plays (Eagle Ford, Marcellus, Utica, Granite Wash, etc.). Overall, we expect the U.S. gas rig count to fall about 190 rigs (or 33%) from current levels."

If West Texas Intermediate is below $80/bbl, forecasted exploration and production (E&P) cash flows "will likely be coming down as we see production growth more than offset by significantly lower crude oil and NGL prices. After inserting our new price deck and adjusting for our current production forecasts given the lower rig count, E&P cash flows are expected to decline significantly both this year and in 2013."

In related news, Kirby Corp., which supplies engines and transmissions that drive U.S. hydraulic fracturing equipment, said last week it was reducing its 2Q2012 earnings estimate to 80-85 cents/share, a 17% cut from a previous guidance of 97 cents-$1.02. For 2012 Kirby now expects to earn $3.45-3.70/share, 10% lower than its previous expectation of $3.85-4.05.

"Our lower guidance reflects deterioration in the manufacturing area and softness in the oilfield-related engine and transmission sales and service and parts sales at United Holdings, our land-based diesel engine services operation," Kirby stated.

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