U.S. natural gas producers’ “zest” to continue pouring it on to up their output in light of full storage and low prices may appear foolhardy, but considering their motivations, the growth in the U.S. rig count isn’t too surprising, said energy analysts at Barclays Capital.

In a note to clients Tuesday, analysts Jim Crandall, Biliana Pehlivanova and Michael Zenker dug a little deeper into the reasons why U.S. gas drilling still is running nearly at full tilt despite current market conditions.

“The expectation that producers drill only when spot prices are at or above all-in costs fundamentally misses independents’ approach to the business,” wrote the trio. “Producers do respond to spot and forward prices, but [they] must balance the economics of incremental drilling in a market where prices are difficult to forecast…”

Independents, they wrote, “must heed the strong motivation to grow production — the key metric for investors’ judgment.”

In fact, said the trio, “We think the current drilling momentum will carry the rig count higher through the third quarter of this year, by which time persistently low spot and forward prices should cause producers to trim drilling.”

Their forecast may be right on line. Wednesday Encana Corp. CEO Randy Eresman said his company may in fact increase its spending in onshore gas plays this year because it’s able to make money even when gas prices fail to top $5/Mcf on the New York Mercantile Exchange (see Daily GPI, April 22).

Besides the independents with strong bottom lines, however, the Barclays team noted that “producers are strongly driven to deliver to their equity investors what those investors most demand: growth.”

The U.S. gas industry is “highly fragmented, with the top 20 producers comprising less than half of U.S. production,” and “investors (rightly, in our view) believe that an individual producer’s actions have no significant bearing on prices.”

Weak gas or oil prices are not put on the doorstep of a particular producer by investors, the analysts noted. “Instead, investors focus on those aspects of company performance that are considered within the scope of management control: production, costs and other factors.”

If a producer stops or slows down its drilling, “it quickly becomes a shrinking company,” said Crandall and his colleagues. “The conventional view is that no one can predict prices (our feelings are only slightly bruised), and therefore, producers should focus on what they do best — manage cost-effective production growth and not try to outsmart prices.”

If U.S. gas producers cut drilling and prices jumped, “producers would soon be expected to announce expanded drilling activity. Call it ruinous competition, or perhaps one of America’s best inflation fighters, but as long as the production growth business model remains, it is hard to see how producers would shift their actions.”

Beginning in early summer, the Barclays team said, it expects capital expenditure spending cuts to be announced by some independents. For now, however, “we expect the rig count to inch higher.”

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