"High return" natural gas plays like the Marcellus Shale and Colorado's Pinedale Anticline, which generate profits even at sub-$4/Mcf gas prices, should see rig activity jump a total of 18% over the coming year, according to an analysis by Raymond James & Associates Inc.
Raymond James analysts John Freeman, Pavel Molchanov and David Luke Eller took a closer look at what's happening onshore in the gas plays in a note issued on Monday. Liquids-rich plays, they said, have a lot going for them but there's still plenty of money to be made in some onshore dry gas basins.
"We anticipate that the Pinedale rig count will remain fairly steady through 2011, echoing recent commentary by Ultra Petroleum -- one of the most active drillers in the Pinedale," the analysts said.
"In the Marcellus, the play's robust production rates and modest completed well costs (relative to other shale plays) allow operators to generate acceptable returns even at $3 gas." Even with "substantial" held-by-production drilling, joint venture agreements, liquids-rich areas in the southwest area of the play and a pricing uplift from its proximity to the Northeast, "the Marcellus' advantageous cost structure will keep operators drilling," they noted.
In the "high-return" plays, the Raymond James team anticipates drilling activity to increase about 18% over the next year to end 2011 at about 140 rigs, up from close to 120 rigs today.
In general, the analysts expect the onshore gas rig count to drop by about 100 by the end of next year. Most of the cutbacks are expected in the Haynesville Shale and in vertical gas plays, which together should bring the rig count down by around 38%, said the Raymond James team.
Close to one-fifth (18%) of the U.S. gas rig count today is tied to JVs, HBPs and other commitment-type drilling, according to Raymond James. By the energy team's estimate, unconventional gas JVs and other deals between majors and independents have totaled nearly $28 billion "since the start of the gas down cycle in mid-2008." They didn't include ExxonMobil Corp.'s takeover of XTO Energy Inc. for $41 billion at the end of 2009, which was completed a few months ago.
"These rigs are highly inelastic to gas prices due to their promoted structure, as the E&P company drills on someone else's nickel," the Raymond James team said. HBP drilling, as well as drilling to fulfill minimum midstream volume commitments, "are slightly more elastic," but rigs in those operations should continue to remain solid for another six months to a year.
Liquids-rich plays are expected to account for about one-third (35%) of the domestic gas rig count by the end of 2011.
Don't count out the vertical gas rigs, either. Recent meetings with private operators indicated to the Raymond James analysts that vertical costs are in "extremely good shape and while they may not be minting money at these depressed gas prices, they aren't jumping off the cliff yet either."
In 2011 the vertical gas rig count is expected to fall, "but it isn't going to zero." More likely it will fall by 95 rigs, or 29% between now and the end of 2011, still accounting for about 27% of total gas drilling. Today vertical rigs account for 35% of the gas rig count.
Analysts with Tudor, Pickering, Holt & Co. Inc. (TPH) said Monday they are expecting a flat domestic rig count in 2011, with "oil better, natgas worse. We are consensus in this respect."
"For 2011, we expect an average US rig count of 1,679, up 9% over the 2010 average, but basically flat (down 30 rigs) from 4Q2010 levels. If there's bias to our rig count assumptions, we think it's up," said the TPH team. The oil-directed rig count so far has outpaced its expectations for the final three months of 2010 and "body language for E&Ps says to expect more of this."
In addition, the TPH analysts said the trend is toward more E&P equity offerings that would "shore up their ability to fund 2011...even if it's on continued gas [capital expenditures]."
TPH is forecasting a drop in the U.S. gas rig count of 125 rigs from 4Q2010, partially offset by growth in oil-directed rigs of 85 rigs. "For 2012, we foresee continued strength in the oil directed rig count plus 8% over 2011, essentially flat gas activity, and an overall domestic rig count plus 6% to 1,780.
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