Between now and the end of the year, the United States should drop 130, or 40%, of the rigs drilling in dry natural gas plays, according to the energy team at Raymond James and Associates Inc.
In a note Monday, analysts J. Marshall Adkins, Collin Gerry and Lenny Bianco said “even the ‘perma-bulls’ have to dial back assumptions sometimes…Lower natural gas prices are going to have an effect on the rig count.”
In just the past week several U.S. gas producers have announced plans to reduce their drilling programs in 2012, including Chesapeake Energy Corp., the No. 2 gas driller in the country, which is cutting its dry gas spending by 70% and slicing in half operated gas drilling activity (see Daily GPI, Jan. 24). ConocoPhillips is shutting in 100 MMcf/d of its U.S. output, while Consol Energy Inc. and Occidental Petroleum Corp., among others, also are reducing their gas drilling (see Daily GPI, Jan. 27; Jan. 26a; Jan. 26b). Comstock Resources Inc. said Monday it was moving some of its domestic gas rigs to liquids plays.
Raymond James is estimating that there currently are around 800 gas-directed rigs running in the United States, with an estimated 40%, or 315 rigs, drilling for dry gas, with little or no natural gas liquid or crude oil contribution.
“By year-end 2012, we think the dry gas rig count will fall from 315 rigs today to less than 190 rigs (a 40% decrease) followed by another 20%-plus decrease in 2013,” said the trio. “For wet gas rigs, which currently total 490 rigs, we think activity will stay resilient but will bleed modestly lower in 2012. Specifically, we think the wet gas count will fall from 490 rigs active today down to about 470 active rigs by the end of 2012.”
Roughly 180 new oil rigs are predicted to begin drilling by the end of 2012, which would be a gain of 15%. Based on the loss of gas rigs and gain of oil rigs, the net result would be a gain of about 30 rigs between now and year’s end, which would represent a “very flat 2% growth.”
Based on the analysts’ calculations, the 2012 average rig count is expected to hit 2,031, 8% above 2011’s average rig count of 1,879. The updated 2012 rig count forecast is 7% lower than Raymond James’ previous forecast of 2,172 average rigs for the year. Using current strip pricing for commodity prices layered, “we could see a reacceleration in operator cash flows as a result of accelerating production declines” in 2013, indicating 6% rig count growth over 2012.
Returns on U.S. oil wells are “outstanding at today’s oil prices,” but lower gas prices would “clearly have a negative impact on the industry’s cash flow available to drill more oil wells…The biggest takeaway to us is that the two-year trend of significant cash flow growth appears to be leveling off largely because of the fall in natural gas prices.”
Last year natural gas still comprised roughly one-third of U.S. exploration and production (E&P) cash flow, noted Adkins and his team. “Thus, a 25%-plus decline in gas prices (moving from $4.00/Mcf in 2011 to below $3.00/Mcf) in 2012 will have a negative effect on overall industry cash flow.”
The bigger driver obviously is going to be oil prices, they noted. If current strip oil prices are around $100/bbl West Texas Intermediate, “E&P cash flows should drift modestly higher in 2012, thereby allowing the oil-directed activity increase to more than offset a dry gas decrease.” If oil prices this year fall closer to around $90, domestic E&P cash flows “could be down 10-15% in 2012 before picking back up in 2013.”
The trio acknowledged that only reviewing E&P cash flow is simplistic because E&Ps routinely outspend their cash flow. In addition the industry is “wily” in finding capital to fund oil and gas well returns by using royalty trusts and joint venture (JV) partnerships, for example.
“We expect the overall U.S. gas rig count to fall about 150 rigs (or 19%) from current levels,” said the analysts. “From a bigger picture perspective, our gut tells us the gas count must and will fall more in 2012 but, when we look at it on a basin-by-basin level, JV programs, leasehold drilling and specific high-return areas seem likely to limit the magnitude of the gas rig decline in 2012.”
Beyond 2013, “the crystal ball gets murkier. We think that the trend in operator cash flows is a significant determinant of longer-term drilling activity. Given the huge production growth we’re seeing, even if oil prices stay flat and gas prices stay weak, we expect modest growth in cash flows can continue to drive 5-8% rig count growth.”
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