The summer market for natural gas has improved for producers, but there are obstacles still in play, according to an analysis by Raymond James & Associates Inc.
In a note Monday the analysts, led by J. Marshall Adkins, said the higher U.S. price for natural gas bodes well for gas drillers. Improved prices “will hold up for the next several years and drive a very slow recovery in natural gas drilling. If oil prices fall in 2014, like we expect, the move back to gas could accelerate.”
Front-month Henry Hub natural gas prices over the past five years “have remained rangebound somewhere between $2.00-4.00/Mcf,” Adkins noted. “Over this same time frame, the gas-directed rig count has fallen by 1,180 rigs (or nearly 75%) to 420 rigs from of a peak of 1,600 — all while domestic gas production has continued to effortlessly grow.”
Prices have moved higher, led by additional weather-driven gas demand, which in turn has resulted in a big reduction in the gas storage overhang. “Has the ‘all clear’ bell been rung?,” asked analysts. “Not necessarily.”
The summer gas market “has improved for the better and is likely to limit further declines.” However, there are caveats:
“Accordingly, we expect the gas-directed rig count will improve modestly over the next 18 months and average 433 rigs during 2013, up over 50 rigs from our previous 378 gas rig forecast, but still down 123 rigs from last year’s 556 average active gas rigs,” said Adkins and his colleagues.
Analysts don’t expect the gas rig count to return “anywhere near” the all-time highs, but the recent price rally “could prompt a mild resurrection of activity in some of the dry gas markets — particularly the Marcellus. With the last two weeks’ net 11 gas rig add (per Baker Hughes) in mind, it wouldn’t surprise us to see more gas rigs coming back to work over the next few months.”
For U.S. oil rigs, the domestic count should “drift slowly lower” this year and next in part because of technology and in part to balance the market, according to Raymond James. A review of data now is forecasting that the average oil rig count will fall by 170 this year to average 1,749 active rigs because of three things: early 2013 drilling activity has recovered more slowly than expected; a switch to horizontal from vertical rigs means fewer rigs are needed; and a shift to pad drilling from leasehold drilling also means fewer rigs.
“Next year, our more bearish crude price outlook leads us to establish a 2014 U.S. rig forecast of 1,650 average active rigs, which is down another nearly 6% (or 100 rigs) versus 2013,” wrote Adkins. “Eventually, drilling activity needs to slow at some point in order to balance the oil market, and lower oil pricing is the mechanism to get you there.” The 2014 average U.S. onshore rig count forecast now is 1,650, which would be 6% lower on average than in 2013.
Raymond James’ team is bearish, but “actual drilling activity has fallen short of even our expectations.” Schlumberger Ltd. CEO Paal Kibsgaard noted the same in a speech last week, saying U.S. onshore customers were adding fewer rigs than anticipated (see Daily GPI, March 25).
The “Big 3” plays — the Permian, Bakken and Eagle Ford — “will likely represent the largest absolute decline in oil rigs, the more marginal plays such as the Midcontinent region will likely fall in the largest percentage terms,” said Raymond James analysts. “Looking outside the 14 major basins, we expect that these smaller, more mature reservoirs represent the highest breakeven and as such will likely take a greater percentage cut in drilling rig activity.”
Raymond James expects the Permian vertical rig count to fall 45 rigs, from its current level of 278, to 234 by the end of 2013. Meanwhile, Permian horizontal activity is forecast to grow by 10 rigs, to 185 from 175. “This trend should continue in 2014 with another 35 horizontal (to 220 total horizontal)” as operators become more in tune with the play.
In addition, pad drilling “is still in early innings,” but operators are moving toward it rapidly, noted the analysts. “By doing development drilling from a pad, operators significantly reduce rig moving times. By reducing moving times, pad drilling can decrease total drilling times from 10-40%, depending on well depth. That means increased wells drilled per rig (or fewer rigs per well drilled).”
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