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 last week.

Barclays Capital analysts Jim Crandall, Biliana Pehlivanova and Michael Zenker last week 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.”

The forecasts 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 related story). Oilfield service operators also think drilling will continue to be strong through the second quarter and then retreat in the second half of the year (see related story).

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.”

Gas drillers continue to generate returns in lower-cost unconventional basins, but “range-bound gas prices…may potentially disrupt current activity” in the second half of the year, Halliburton CEO Dave Lesar said last week. “We do not anticipate a major correction in the rig count, but prices will be range-bound for a significant time,” Lesar told energy analysts during a conference call. “We see limited substantial improvements in the margins in our North American business for a few quarters.”

Shale basin drilling in the United States is continuing “unabated,” allowing the service company to recoup some of the costs of services it lost when the economy went south, said the CEO. “Drilling in unconventional basins is taking precedence over conventional drilling because it generates better returns.” U.S. gas drillers have barely slowed their onshore drilling activity this year and Halliburton sees only a “moderate rate of unconventional rig decline” in the short term.

According to last week’s Weekly Rig Roundup by Tudor, Pickering, Holt & Co. (TPH), U.S. land activity is “still climbing” with three sources showing week/week (w/w) gains for the week ending April 17. RigData reported a gain of 41 rigs, Smith Bits said two more rigs were added, and Baker Hughes Inc. showed a gain of 14 rigs.

By hydrocarbon target, TPH said the uptick in onshore drilling was weighted to oil/liquids activity. The gas rig count fell by 10 rigs w/w, while “oil/gas,” or natural gas liquids-directed drilling gained 30 rigs. The U.S. onshore oil rig count added 15 rigs; six “unclassified” rigs also were added.

“In the oil-rich gas plays we’ve seen oil-directed rigs more than double from the trough from 2009, growth we have not seen since the 1990s,” said Halliburton’s Tim Probert, president of Global Business Lines and Corporate Development. “In the wet basins the activity has been quite high…These assets generate higher returns than dry gas because of the liquids content. But extraction can be difficult. The plays are increasingly being drilled horizontally, which can be quite intensive.”

Halliburton is “seeing a couple of things” as drillers shift to oilier plays, said Probert.

“There is pressure on dry gas, but many of the producers have strong hedge positions in place,” he said. “They will drill to hold a lease and then shift to liquids plays, and most of them are now discussing that in some detail. Generally speaking, we are seeing dry gas dropping a little and some strength in liquids [drilling].”

Probert said “clearly” there is some tightening in the gas drilling market. “There’s a general sense that customers are getting their work done in their time frame. But they are more oriented toward our stimulation equipment than every other product line. During the course of this year, we expect to see a significant rebalance of equipment focusing on areas where there are the most opportunities for the short, medium and long term. They are relocating equipment where it makes sense to do so.”

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