If North American natural gas drillers continue to lay down rigs at a moderate pace, inventories and price supports should rebalance toward the end of 2009, Barclays Capital energy analysts said.

The U.S. gas rig count has fallen at a frenzied pace in the past few weeks, and Barclays analysts said they were encouraged that producers have responded to the falling price signals as quickly as they did.

“For those not steeped in the industry, it might be surprising that producers are drilling at all, given the natural gas price environment and bleak demand outlook,” wrote analysts James Crandell, Biliana Pehlivanova and Michael Zenker. Several things have kept rigs running, they said:

“Historically, all major natural gas price drops have been followed by a pullback in drilling, but one that takes time,” Crandell and his team noted. “The pullback in drilling following the price drop in 2001 lasted nine months, as an example. We expect the rig count to drift lower through 2009 as the prospect for a price rebound to levels that support drilling is slim.”

Still up for debate is the actual number of rigs needed to maintain gas production. For instance, because no two unconventional gas wells are the same, the number of rigs needed to maintain output in ranges from 800 to 1,300, with the industry consensus at around 1,100, the Barclays analysts noted.

“Producers have been steadily cutting drilling since the peak in August 2008, exceeding the pace we expected,” said the analysts. “In fact, if the rig count cut continued at the average weekly pace since the peak, the count would drop below the 1,100 level by March 2009.”

Independents will be responsible for most of the drilling cutbacks through the rest of the year, said Crandell and his colleagues. The majors have moved back onshore, but they “tend to be more strategic, and more concerned about reserve replacement; therefore, their drilling activity does not move as rapidly in response to short-term price movement.” Gas-directed onshore drilling in the United States by the majors has overall “fallen a mere 3% since the August peak, whereas total gas-directed drilling has dropped 16%.” Since the majors represent just 5% of the onshore drilling — excluding investments in other producers — their impact on gas production trends in 2009 “will be muted.”

There were close to 400 privately held, “mom-and-pop” producers drilling for gas at the peak last August, Barclays estimated. These smaller producers average only two rigs each, but they comprised almost half — 46% — of the onshore gas drilling at the August peak. Consequently, their decision to lay down rigs has been quick — Barclays estimated that since last August, this group has been responsible for 64% of the rig cuts. “We think there are more cuts to come from the mom-and-pop group, but they have clearly spoken first.”

Now it’s up to the independents to carry the rest of the burden. Barclays estimated that overall, the “top 30” independents and majors have trimmed their total rig count 11%, compared with a 21% cut by all companies not in the top 30.

“The independents tend to dominate the unconventional/shale drilling, since these resource plays require a bigger commitment and drilling program than the mom-and-pops can support,” noted the Barclays team. “As a result, the cuts in drilling so far have not been focused on horizontal drilling, and horizontal drilling is still at 122% of year-ago levels. Thus, we expect drilling cuts to be concentrated with the independents, and these cuts to increasingly eat into horizontal drilling.”

To achieve a balance, however, gas prices have to move higher, said the Barclays analysts. Gas prices now have fallen to a level “that we believe is unsustainable in the longer run, not only in the front of the curve, but further out.” The market, they said, “has largely overlooked the effect that the current cold weather snap should have on inventories.”

Barclays’ analysis comes on the heels of a report by the American Petroleum Institute, which earlier this month reported “warning signs” that the frenetic drilling pace of a year ago was slowing down (see Daily GPI, Jan. 15). FBR Capital Markets said earlier this month that the North American gas rig count was in “free fall” (see Daily GPI, Jan. 12). And SunTrust Robinson Humphrey/the Gerdes Group is forecasting a one-third reduction in U.S. gas drilling activity, with the average rig count to fall to around 1,000 this year.

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