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Marcellus, Eagle Ford Drilling Expected Up in 2011

Onshore natural gas plays that are able to generate profits even when gas prices are below $4/Mcf, including the Marcellus Shale, should see rig activity up by 18% in 2011 over this year, according to analysts with Raymond James & Associates Inc.

In addition, liquids-rich gas plays like the Eagle Ford Shale, are expected to account for about one-third (35%) of the domestic gas rig count by the end of next year, said analysts John Freeman, Pavel Molchanov and David Luke Eller in a note issued on Monday.

Although a lot of attention has been generated by higher profits in plays with natural gas liquids, there's still money to be made in some onshore dry gas basins, said the trio.

"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," they wrote. 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."

In these types of "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 around 120 rigs today.

In general, the Raymond James analysts expect the onshore gas rig count to fall by about 100 by the end of next year. The Haynesville Shale and vertical gas plays are forecast to see the biggest rig declines, and together should bring the rig count down by around 38%, said the analysts.

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. 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 shale giant 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.

Analysts with Tudor, Pickering, Holt & Co. Inc. (TPH) said Monday they are forecasting 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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