There is a “strong” possibility that exploration and production (E&P) companies are timing ramped up production with expected higher natural gas prices later this year, according to Raymond James’ energy analysts. Analysts Marshall Adkins and James M. Rollyson had expected the ramp up to occur earlier in the year because of price increases this spring, but a “number of factors” has led to a delay and probably a “serious catch-up” phase 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” and 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.”

So far, production appears to have fallen slightly in the second quarter, and dropped more than 8% from the same period a year ago, according to Lehman Brothers analyst Thomas Driscoll. He based his figures on the quarterly results of 24 producers that account for 28% of the gas supplies in the Lower 48. Driscoll found a sequential decline from the first quarter of 0.6%, with gas volumes by the 24 totaling 11,391 MMcf/d. The analyst had earlier predicted an even smaller increase in the second quarter, which may bode well for the rest of the year.

“We are forecasting that full-year 2002 natural gas production volumes will fall 4.5-5.25% from 2001 levels,” said Driscoll. “This follows an estimated production increase of 0.7% in 2001 and a decline of 2.05% and 1.3% in 1999 and 2000.”

According to Lehman’s, Houston-based Spinnaker Exploration will have the largest second quarter production increase, up 27% from the first quarter of this year, but year-over-year, the company will be down about 9%. Also posting positive production results in the second quarter include Vintage Petroleum, 9%; XTO Energy and Pogo Producing, 8%; BP, 7%; and Ocean Energy, Forest Oil and Chesapeake, 5%. Those reporting declines for the quarter include Denver-based Tom Brown, 12%, USX Marathon 11%; Swift Energy, 9%; Burlington, 8%; and Murphy Oil and Nuevo Energy, 7%.

Cloyce A. Talbott, CEO of Patterson-UTI Energy Inc., which is one of the largest land-based oil and gas drillers in North America, said that a decline in drilling activity that began in August 2001 continued into the first quarter until early March, “when our U.S. working rig count bottomed at 90 rigs. Our activity level then increased, and in the second quarter we averaged 115 rigs working in the U.S. and 4 in Canada. For the week ended July 12, we averaged 123 rigs working, including 116 rigs in the U.S. and 7 rigs in Canada.”

Talbot said the company is retaining its “most experienced field personnel” and improving equipment “in anticipation of further increases in demand for our drilling services. Although this continues to have the effect of increasing our costs and reducing our margins, we are confident that our operations will benefit as the industry improves.”

Patterson-UTI Chairman Mark S. Siegel said that from mid-May through June, the contract drilling industry was marked by relative stability in activity levels and pricing. But he warned that the current level of drilling activity “will be inadequate to overcome the reported decreases” in gas production arising from depletion.

“Although supply decreases have been noted by many industry observers, above-average natural gas storage levels raise concerns about the direction of natural gas prices, and the concerns are heightened by the changes in the reporting of such storage levels,” said Siegel. “We expect the current activity level to continue throughout the summer months, until the effect of declining supply becomes ever more apparent as we approach the winter months. We believe that significantly increased drilling will ultimately be necessary to offset the decreasing supply of natural gas.”

Drilling contractor GlobalSantaFe Corp. said conditions for drilling worldwide were “generally stable and improving.” However, the U.S. Gulf of Mexico jackup market “showed noteworthy improvement, with average dayrates for the company’s Gulf of Mexico-based jackups at the end of the second quarter gaining about $4,100 from levels realized at the end of the earlier quarter.” GlobalSantaFe noted, however, that there was a weaker market for floating rigs, including semi-submersibles and drillships.

A Gulf of Mexico-based semi-submersible began a new contract in the quarter, but “at a significantly lower dayrate.” However, CEO Sted Garber said the Gulf is expected to be an area of “growing demand for high-end jackups like ours” that would “continue to push dayrates for these rigs higher.

Gene Isenberg, CEO of drilling company Nabors Industries Ltd., noted that Lower 48 land drilling had declined “significantly” over the first quarter, and the Gulf of Mexico offshore unit was “essentially flat.” However, he expects that will be changing in the next few months.

“In the U.S Gulf of Mexico, we expect a modest improvement in the third quarter with a more meaningful increase likely in fourth quarter,” Isenberg said. “The remainder of our businesses, primarily those that are largely directed at the North American gas markets, are stable and we anticipate improving market conditions throughout the year, although probably at a slightly slower pace.”

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