The North American rig count has picked up in recent weeks, but the gains have been nearly all to the oil side, and natural gas isn’t likely to see any sustainable improvement before storage injection season is complete, according to energy analysts.
“This ebb/flow of oil-related drilling increasing and flattish/down gas activity will likely continue for a few months,” wrote the energy team at Tudor, Pickering, Holt, & Co. Securities Inc. (TPH). “It is clear that near-term NAM [North American market] profitability is worse than everyone expected” coming into 2Q2009. “The NAM longer-term activity outlook is far less clear.”
What is certain to TPH analysts is that the ratio of horizontal rigs to vertical rigs “looks to be permanently changed…so historical look-backs for absolute activity comparisons are not that meaningful.”
Analysts now are trying to determine how many rigs at the macro level will be needed by exploration and production (E&P) companies for new shale gas production. For now, they are forecasting an E&P recovery shaped more like a “U” than a “V.”
“What we know is that it isn’t 1,600+ gas rigs that we saw at the September 2008 peak,” and it’s not less than 700 gas rigs currently drilling, said the TPH team. “Beyond the activity question, pricing/asset overcapacity are additional issues that must be worked through. We’re afraid that the risk to NAM recovery is really E&Ps jumping the gun with recently raised capital (both debt and equity). This might encourage incremental spending too soon (before supply declines have truly cleaned up the gas market) and in turn result in a W-shaped recovery…not our base case, but more afraid of this today than we were three-months ago.”
TPH revised its U.S. rig count estimates for 2009. Analysts now are forecasting the domestic rig count will plunge 46% from a year ago with sequential recovery throughout 2010. Overall, however, the 2010 rig count is estimated to grow only 5% from 2009, said the analysts.
“For the next few months we assume that oil-directed activity increases are offset by some modest additional gas declines,” TPH analysts said. “If the trends of the past two weeks are any indication, this will prove too conservative and our rig count forecast will prove too low…we’ll happily raise our estimates next time around.”
Separately, energy analysts at Barclays Capital reminded clients in a note that gas inventories are “still weakly positioned versus historical levels. Even normal seasonal builds from here would allow for a record fill at the end of injection season. We think that realized spot prices for the rest of 2009 will reflect the surfeit of natural gas available as imbalances continue to be ironed out, presenting further downside price risk in 2009.”
Instead of speculating whether producers will cut rigs enough to lower production, “the past few months have evidenced a 55% cut in the rig count from the peak,” the Barclays team noted. “The effect should be felt, provided producers do not rebuild the rig count early or too rapidly…While demand is still rife with weakness, an improvement in the real economy is expected to support price ahead.”
The Barclays energy team is still forecasting a fall in U.S. gas supplies and a recovery in demand as the year progresses, but “the balance seems slightly more skewed by bearish factors than bullish factors since we last conducted a top-to-bottom review of our balances. Supply has remained higher and demand lower” in the first half of 2009. “And, there are some signs that producers may return to drilling sooner and more robustly. Thus, the recent strength in prices has occurred, in our view, against a backdrop of weak fundamentals.”
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