There is a “strong” possibility that exploration and production (E&P) companies are timing ramped-up production to hit with the expected higher natural gas prices later this year, according to Raymond James’ Energy’s “Stat of the Week.” Analysts Marshall Adkins and James M. Rollyson had earlier predicted an earlier ramp-up because of the rise in prices over the spring, but a “number of factors” has led to an unexpected stagnation that will lead to “serious catch-up” later this year and throughout 2003.

The analysts’ previous rig count forecast called for an average 885 rigs in 2002, rising to 1,100 rigs in 2003. However, they revised the forecast slightly to 865 rigs for 2002 and 1,075 for 2003 — noting that next year’s forecast “will likely prove to be conservative.” The amount of money spent for refurbishing rigs over the past two years “means that drilling equipment will not be a bottleneck to a rising rig count. Instead, the logjam will come from rehiring people and logistics issues.”

Answering the question as to why the U.S. rig count has not continued to ramp upward in light of a $3-plus 12-month gas price, Adkins and Rollyson said they believe the smaller independents represented most of the initial rig count surge in April. “Since these smaller players typically react quickly with their checkbooks rather than slowly with bureaucratic budgeting processes, they were able to take advantage of the rapidly rising gas prices in the spring.”

However, they noted that “recent uncertainty about near-term natural gas prices has led to further spending reluctance from the larger E&P companies. Also, the recent rainy weather in Texas prevented many rigs from being moved or going back to work. Assuming that the smaller independents were responsible for the initial drilling increase, the analysts speculated that summer vacations may have “aided in the sideways trend through the Fourth of July,” a phenomenon that would not have happened in a tighter market for rigs. “Add all this up, and you get a generally flat near-term rig count” with most trying to catch-up through the rest of the year and into 2003.

Adkins and Rollyson noted that it is “apparent” that many E&P companies are taking a “wait and see” attitude toward gas prices before they decide to spend more money. “Unfortunately, the consensus opinion on the direction of near-term natural gas prices has been generally bearish over the past few months. Even though we are not in tune with this…consensus, the overall bearish tone, combined with unreliable weekly Department of energy gas storage data, has given operators (and analysts alike) little visibility or confidence in the direction” of prices through the end of injection season. “Unfortunately, this means that the ramp-up in the drilling business is probably one to two quarters behind initial expectations.”

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