The U.S. oil and natural gas rig count will fall through 2013, with a “glaring change” to the forecast for wet gas drilling, according to Raymond James & Associates Inc. A “meaningful rebound” won’t occur until the second half of 2014 and through 2015, analysts said Monday.
J. Marshall Adkins and his colleagues, who offered a pessimistic forecast for oil drillers last week (see Shale Daily, June 19), were no less kind to drillers of any stripe in their latest Energy Stat. The update follows one posted in mid-April in which the team predicted that the 2013 domestic rig count forecast would decline 10% over the course of next year (Shale Daily, April 19).
They now expect the annual onshore oil rig count to increase only around 4% this year and fall by 13% in 2013.
“In fact, we think the looming oil supply problem potentially could be so severe that West Texas Intermediate (WTI) oil prices must fall far enough to drive the total U.S. onshore rig count down roughly 25% from now until exit 2013,” the analysts wrote. “Keep in mind that consensus expectations for 2013 still assume increasing drilling activity year/year (y/y). To put this into perspective, last week the total rig count reached 1,966 rigs, and we anticipate by the end of 2013 there will be roughly 1,470 active rigs.”
Raymond James now pegs the 2012 rig count average at 1,944, which is down 4% from the April forecast. More important, “we are now expecting the 2013 rig count will average 1,693 rigs, which is down 13% from our expected 2012 average rig count assumption and down 13% from our prior forecast.”
Even with the big shift from onshore natural gas plays, there still are 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. Given the oversupplied 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 WTI is sub-$80/bbl, Raymond James 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.”
Raymond James’ long-term oil forecast is around $80/bbl WTI, and the increase in production combined with a “rebound” in oil prices and a recovery in natural gas prices “should leave energy companies well positioned for a 2014 and 2015 recovery.” By their estimates, 2014 cash flows could rebound to “near 2011 levels” and 2015 cash flows could be 7% higher y/y.
According to Tudor, Pickering, Holt & Co.’s Weekly Rig Roundup on Monday, in U.S. land activity week/week (w/w) RigData reported that 28 rigs were added, trailing the four-week average of 22 added rigs, while Smith Bits recorded three total new rigs, trailing the four-week average of a loss of 14. Baker Hughes Inc. reported that one rig was added in total last week, with 17 new oil rigs and the loss of 20 gas rigs, trailing the four-week average of a loss of 13 total rigs.
TPH reported “another nice uptick in horizontal activity,” with 14 rigs added w/w, while the prior week added 20, driven by the Williston Basin with eight rigs. The largest w/w changes were seen in the Rockies, where 15 rigs were added, trailing the four-week average of four additional rigs; the Texas Permian, which added seven rigs versus the trailing four-week average of three rigs; and the Haynesville Shale, which lost seven rigs versus an average of 11 in the previous four weeks.
In related news, Kirby Corp., which supplies engines and transmissions that drive U.S. hydraulic fracturing equipment, said Monday 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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