Raymond James analysts are lowering their 2002 rig count forecast but holding steady their forecast for 2003. Despite the recent sharp increases in oil and gas prices, producers have not responded with increases in drilling. The apparent disconnect seems to be related to their desire to use increased cash flows to strengthen balance sheets rather than re-invest in the drill bit, said Raymond James’ Marshall Adkins.

The total U.S. rig count for the week ending Aug. 30 was 847, or nine more than the previous week, according to Baker Hughes (see intelligencepress.com ). However, the rig count is flat compared to the same time in July and down 32% from the same time last year. Oil rigs ended the week flat, while gas rigs were up 1%. The number of total gas rigs are down 30% while oil rigs are down 44% compared to the same time last year. In addition, the number of oil rigs drilling in the Gulf of Mexico is down 57% from last year, while the number of gas rigs in the Gulf is down 18%.

“Unfortunately, most E&P companies are currently taking a wait-and-see attitude regarding the sustainability of these higher energy prices,” Adkins added. “By holding back spending (and the rig count), gas producers have been able to mend balance sheets and build cash positions. In the next four or five months, however, these frugal spending habits are likely to change dramatically.

“As we move into this upcoming winter, we believe both the gas markets and E&P companies will be forced into believing in the sustainability of $4+ per Mcf natural gas prices,” said Adkins. “When that happens, look for the U.S. rig count to begin moving sharply higher…”

Adkins expects the third quarter rig count to end at 846, which is down 36 from his prior forecast. He lowered his fourth quarter forecast by 100 rigs to 856, but left his full year 2003 forecast unchanged at 1,075 rigs, which would be a 30% average increase from 2002 levels.

“The reason for our 2003 optimism stems from our confidence in higher U.S. natural gas prices beginning this winter.”

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