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Quarterlies Encouraging, But Biggest E&Ps Still to Report

The largest oilfield services (OFS) providers have detailed their views for U.S. exploration and production (E&P) spending this year -- all good -- but it's going to take a few more weeks to determine whether producers will move more forces into natural gas fields to increase stores.

The lengthy winter season is having an impact on some earnings results for E&Ps, a trend sure to continue as the biggest independents and majors roll out their reports in the next few days. On tap are ExxonMobil Corp., BP plc, Royal Dutch Shell plc, Chevron Corp. and the biggest U.S. independent ConocoPhillips. The following week the biggest independents line up.

So far, so good. The top OFS providers and two of the biggest contract drillers reported an unexpectedly big push for onshore and offshore newbuilds and top-of-the-line drilling equipment (see related story). Another big draw is the Permian Basin, according to Schlumberger Ltd., Halliburton Co. and Baker Hughes Inc., and contract drillers Patterson-UTI Energy Inc. and Helmerich & Payne Inc.

However, Standard & Poor's Ratings Services (S&P) is expecting to see less enthusiasm about natural gas growth from domestic E&Ps. Primary credit analyst Marc D. Bromberg said the winter rallied gas prices early, but there's not a lot of cheering for the long-term pricing prospects given the growth from associated gas from oil and natural gas liquids (NGL) drilling.

"The vast majority of our E&P issuers have crude acreage in their reserve base, and we expect that the development of these reserves should continue to drive stable credit protection measures through the end of this year and into 2015," Bromberg said.

"We expect that a vast majority of drilling rigs will continue to focus on crude prospects and that a majority of dry gas or NGL production will simply be a byproduct of crude-targeted programs." Gas production growth this year should help to replenish gas in storage. "As a result, we think that gas prices are likely to remain relatively flat from current levels."

Analysts with Tudor, Pickering, Holt & Co. Inc. (TPH) are expecting to see a lot of variability in the quarterlies, given the winter weather impacts, and the wide range of differentials in the Permian (wider) and Bakken (tighter). Stronger natural gas liquids prices and the big Northeast gas premiums also should make the highlight reel.

TPH is paying close attention to results from several plays, including not only the Permian, but the Utica and Tuscaloosa Marine shales and the south-central part of Oklahoma, where the Mississippian Lime and Woodford Shale intersect.

Analysts also expect to see "green shoots commentary on gas rig adds, while new completions and tighter downspacing in a number of plays are likely to get air time."

The 1Q2014 announcements over the past few days appear indicative of consensus ending on long/overweight onshore and short/underweight offshore trading, TPH said. U.S. land has had an "unbelievably strong run," with "lots of good news baked in and not reacting to upward revisions."

The offshore providers also are seeing a "whiff of good news," with Diamond Offshore boosted by contracts for older rigs and a resilient jackup market.

"From an investing time horizon," TPH analysts said it "feels early to jump onboard the offshore rig recovery story, given the length of time before we see the market healing," because demand needs to be higher and supply needs to be lower. "For land, maybe we get a buyable pullback after not wanting to chase."

Wells Fargo Securities LLC's energy and utility team said so far, most of the North American land comments have "tracked generally inline" to the analysts' views and those by most E&P investors.

"Addressing 2014, OFS comments suggest that service pricing (ex-Permian) likely remains flattish through year-end in product lines most important to well cost, and the focus remains on driving the mix of 24-hour work higher. This goal along with numerous data points...lends support to the view that best of breed E&P operators have begun the transition to a manufacturing phase defined by ongoing efficiency gains and optimizations."

The 24-hour statistics say it all, said Wells Fargo analysts. Baker Hughes now is near 60%, a 5% sequential gain, and it's targeting 70% by year's end. Schlumberger is at 82%, with 90% on term contracts.

"Operators have frequently touted the benefits of reduced cluster spacing and higher sand volumes, and they are following through as Halliburton stated stage density is up 25% year/year (y/y) in the Eagle Ford and Marcellus, and average completion volumes have increased 30% y/y.

"Additionally, service firms growing interest in artificial lift...highlights the immense demand from operators to optimize production and increase end recoveries..." The Utica and Mexico in early reports have been "on the edge of the radar," but Wells Fargo expects Mexico activity to gain more E&P interest through 2015 as the country emerges as a source of natural gas demand and possibly supplies.

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