The U.S. oil and gas rig forecast should be 2.5% higher than it was in 2013, with the horizontal drillers up by 11%, analysts with Raymond James & Associates Inc. said Tuesday.

The total rig count previously was expected to fall by 1.5% year/year. Analysts had forecast horizontals to strengthen, but by 6%.

"All in, we think the U.S. horizontal rig count (annual average) should grow roughly 120 rigs in 2014 (from 1,102 to 1,224) and another 60 rigs in 2015 (from 1,224 to 1,285)," wrote analysts J. Marshall Adkins, James M. Rollyson and Collin Gerry.

The key reasons for the more optimistic forecast include:

  • Horizontal rig switching in the Permian Basin, transpiring faster than expected;
  • Substantially colder winter weather, raising natural gas prices to a point where the Haynesville and Marcellus regions are seeing more activity; and
  • High oil prices, better efficiencies and lower costs allowed U.S. exploration and production (E&P) cash flows to remain stronger than previously modeled.

Analysts noted that in the past 10 years the onshore domestic rig market has evolved into a "three-tier market," defined by mechanical rigs, silicon-controlled rectifiers (SCR) with walking systems and AC rigs, and also with walking systems. Walking rigs allow E&Ps to easily move rigs on a multi-pads.

The shift to more high-tech rigs "has become particularly important and visible over the past six months as the U.S. horizontal activity has surged 10% since mid-2013," noted the trio.

"Clearly, the largest driver of this recent increase in horizontal activity is the acceptance of horizontal drilling as a better solution for unlocking the stacked nature of Permian oil reserves. Specifically, we expect the percentage of rigs drilling horizontally in the Permian to grow from 40% of the total in 2013 to over 50% in 2014," exiting 2014 at 55% of the rig count, with roughly 65 more active horizontals in the Permian this year.

With gassy plays such as the Marcellus/Utica/Haynesville shales enjoying $5.00/Mcf-plus prompt natural gas contracts, Raymond James analysts expect horizontal rig activity in these three plays combined to be up by nearly 30 rigs in 2014.

"On the other hand, we're modeling plays such as the Eagle Ford and Bakken to experience modest declines in overall rig counts," driven by a differentiated West Texas Intermediate forecast. A fixed percentage of work should remain vertical in the Eagle Ford and Bakken, "which should in turn cause the horizontal rig count to move modestly lower in the two plays."

For land drillers, the move to horizontals -- and higher technology -- is good news, wrote the analysts. The demand for horizontal rigs this year should "outpace the supply of new AC rigs."

On the supply side, Raymond James expects 100 newbuilds to hit the market in 2014, based on reports from Helmerich & Payne Inc. (33); Patterson-UTI Energy Inc. (20); Nabors Industries Ltd. (19), and a "handful" from Unit Corp. and Precision Drilling Corp.. Another 25 rigs are expected to be supplied by privates and small independents.

"Comparing the new AC rig supply versus our upwardly revised demand, we come up with a 25-rig shortage in 2014. That means the difference would have to come from either additional newbuilds (if they can get in the queue soon enough) or from reactivated SCR rigs.

"Supporting this conclusion, Patterson recently said it was re-activating SCR rigs and we've heard that some E&P companies have recently been forced to wait six months for a horizontal rig" (see Shale Daily, Feb. 7).

Because of the need for high-performance rigs, "it is now clear that there will be some room for higher-end electric rig dayrates to move north along with increasing utilization, at least until this increased demand is satisfied."