U.S. natural gas drilling won’t collapse even in a sub $4/Mcf world but it will decline through 2011 as more producers shift to oilier plays, Raymond James & Associates analysts said Monday.

Based on research led by analyst J. Marshall Adkins, the Raymond James team said in an updated U.S. rig count forecast that it sees an “earlier rollover” in gas drilling rigs than predicted in early January (see Daily GPI, Jan. 20).

At that time Adkins and his team said North American drilling activity would be “meaningfully higher” this year, but not as high as some in the industry anticipated. The gas market then was seen to be able to support about 1,000 active rigs as it rebounded from 2009 lows.

“Following our last rig count update, the natural gas rig count has increased 17% despite gas prices falling from $6/Mcf in January to $4/Mcf currently,” Adkins noted. “Given the significant drop in prices (and significant increase in U.S. gas supply) from our previous update, we believe that we should start to see the gas rig count hitting a peak sooner than previously thought.

“That said, we do not expect to see a steep drop off for the gas rig count, but a steady, gradual gas rig decline of about 100 rigs (to 880 gas rigs by year end 2010). Since it appears that the U.S. can meaningfully grow gas supply at around 800 rigs, we expect an additional 100 gas rig drop to 780 active gas rigs by year end 2011.”

But the loss of gas rigs wouldn’t be a “disaster” for U.S. service companies, said the analysts. “As budgets are cut and gas rigs are dropped, we expect this to be offset by increased horizontal and ‘oily gas’ drilling. Increasing gas rig counts in the high liquids areas (Granite Wash, Eagle Ford, etc.) will offset much of the gas rig declines in the Haynesville, Fayetteville and conventional gas areas. Thus, we project only about a 20% decline in U.S. gas drilling over the next 18 months.”

The U.S. gas rig count hasn’t collapsed despite the low prices, and they likely won’t, said the analysts.

For one thing, many of the so-called gas wells, as in the Granite Wash and the Eagle Ford Shale, are economic because of their high liquids content, said Adkins and his colleagues.

Some exploration and production companies also are continuing to drill to keep their leases held by production, or HBP. However, the number of HBP drilling is probably around 10-20% not the 80% as some have estimated.

“Only in a few select plays (Haynesville and Fayetteville) do companies need to drill to hold expiring lease acreage this year,” said Adkins. “While the imminent lease expiration argument is overstated, we do think operators are not likely to cut the rig count in many unconventional plays because they must adhere to strict drilling programs (to make sure they get to all their acreage by the time the leases run out in a few years).

“Additionally, there is clearly a concern about high-end rig availability that is keeping some shale operators from releasing rigs even in this low gas price environment. This should keep the rig count from sharply declining in plays like the Eagle Ford, Granite Wash and Marcellus.”

Gas priced at $4/Mcf still is economic for many E&Ps because “many gas plays make sense at $4/Mcf if one ignores sunk costs,” noted the analysts. “If we take out money that has already been spent, a large portion of the unconventional portfolio is economic at current prices.”

In addition, they pointed to the prefunded drilling programs put together by joint ventures (JV) and through hedges.

“Over the past couple of years, shale operators have been quick to form JVs with foreign investors/majors who are eager to gain shale knowledge, expertise, and experience. These outsiders partner up with E&Ps who have acreage positions and pick up the drilling tab, funding all or much of the incremental cap ex costs. Again, this should keep the rig count in the Haynesville, Marcellus and Eagle Ford moving higher and the rig count in areas like the Barnett, Woodford, and Fayetteville from falling too sharply.”

The Raymond James analysts now think the gas rig count will peak at 980 gas rigs and then “slowly” roll over, falling to about 880 rigs at the end of this year. In 2011, they think the U.S. gas rig count will average around 817 rigs, falling about 12% from 2010 levels.

“Longer term, we believe the gas rig count will level out at around 800 rigs since it now appears that level is more than sufficient to grow U.S. gas supply,” said the Raymond James analysts.

In its Weekly Rig Roundup Monday, Tudor, Pickering, Holt & Co. Inc. (TPH) reported that the U.S. rig count week/week (w/w) showed gains, with RigData reporting a gain of 21 rigs, Smith Bits also with 21 new rigs, and Baker Hughes Inc.’s count up by two rigs.

By hydrocarbon targets, the TPH analysis found that natural gas rigs were up by 13 rigs w/w, while “gas/oil” drilling rose by more than 20 rigs. At least four more rigs were drilling for oil, while 16 were unclassified. Horizontal drilling was responsible for all of the w/w increase.

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