In its weekly release,
Houston-based oilfield services company Baker Hughes Inc.
(BHI) reported a dip in the U.S. rig
count (number of rigs searching for oil and gas in the country).
This can be primarily attributed to a decrease in the tally of
natural gas-directed rigs, partially offset by improved oil rig
count.
The Baker Hughes rig count, issued
since 1944, acts as an important yardstick for drilling contractors
such as Transocean Inc. (RIG),
Diamond Offshore (DO),
Noble Corp. (NE), Nabors
Industries (NBR), Patterson-UTI
Energy (PTEN), Helmerich &
Payne (HP), etc. in gauging the overall
business environment of the oil and gas industry.
Analysis of the
Data
Weekly Summary: Rigs engaged in
exploration and production in the U.S. totaled 1,973 for the week
ended March 9, 2012. This was down by 16 from the previous week’s
count and represents the fourth decrease in 6 weeks.
Despite this, the current
nationwide rig count is more than double that of the 6-year low of
876 (in the week ended June 12, 2009) and significantly exceeds the
prior-year level of 1,715. It rose to a 22-year high in 2008,
peaking at 2,031 in the weeks ending August 29 and September
12.
Rigs engaged in land operations
descended by 15 to 1,914, inland waters activity decreased by 2 to
18, while offshore drilling was up by 1 to 41 rigs.
Natural Gas Rig
Count: The natural gas rig count decreased for the ninth
week in a row to 670 (a drop of 21 rigs from the previous week). As
per the most recent report, the number of gas-directed rigs is at
their lowest level since July 17, 2009 and is down more than 28%
from its 2011 peak of 936, reached during mid-October.
The current natural gas rig count
remains 58% below its all-time high of 1,606 reached in late summer
2008, but has rebounded strongly after bottoming out to a 7-year
low of 665 on July 17, 2009. In the year-ago period, there were 882
active natural gas rigs.
Oil Rig Count: The
oil rig count was up by 3 to 1,296. The current tally – the highest
since Baker Hughes started breaking up oil and natural gas rig
counts in 1987 – is way above the previous year’s rig count of 827.
It has recovered strongly from a low of 179 in June 2009, rising
over 7.2 times.
Miscellaneous Rig
Count: The miscellaneous rig count (primarily drilling for
geothermal energy) at 7 was up by 2 from the previous week.
Rig Count by Type:
The number of vertical drilling rigs fell by 7 to 597, while the
horizontal/directional rig count (encompassing new drilling
technology that has the ability to drill and extract gas from dense
rock formations, also known as shale formations) was down by 9 at
1,376. In particular, horizontal rig units – that reached an
all-time high of 1,185 in January this year – fell by 6 from last
week’s level to 1,164.
To
Conclude
As mentioned above, the natural gas
rig count has been falling since the last few weeks, 264 rigs in
fact (or 28%) from the recent highs of 934 in October 28.
Is this bullish for natural gas
fundamentals? The answer is "no," if we look at the U.S. production
and the shift in rig composition.
With horizontal rig count – the
technology responsible for the abundant gas drilling in domestic
shale basins – currently close to its all-time high, output from
these fields remains robust. As a result, gas inventories still
remain at elevated levels – up some 45% from benchmark levels.
In fact, natural gas prices have
dropped over 50% from 2011 peak of about $5.00 per million Btu
(MMBtu) in June to the current level of around $2.30 (referring to
spot prices at the Henry Hub, the benchmark supply point in
Louisiana). Incidentally, prices hit a 10-year low of $2.23 in late
January.
To make matters worse, mild weather
across most of the country have curbed natural gas demand for
heating all winter, indicating a grossly oversupplied market that
continues to pressure commodity prices in the backdrop of sustained
strong production.
This has forced several natural gas
players to announce drilling/volume curtailments. Exploration and
production outfits like Ultra Petroleum Corp.
(UPL), Talisman Energy Inc.
(TLM) and Encana Corp.
(ECA) have all reduced their 2012 capital
budget to minimize investments in development drilling.
On the other hand, Oklahoma-based
Chesapeake Energy Corp. (CHK) –
the second-largest U.S. producer of natural gas behind
Exxon Mobil Corp. (XOM) – and
rival explorer ConocoPhillips
(COP) have opted for production shut-ins
to cope with the weak environment for natural gas that is likely to
prevail during the year.
However, we feel these planned
reductions will not be enough to balance out the massive natural
gas supply/demand disparity and therefore we do not expect much
upside in gas prices in the near term. In other words, there
appears no reason to believe that the supply overhang will subside
and natural gas will be out of the dumpster in 2012.
With natural gas unlikely to
witness a durable rebound in prices from their multi-year plight
and at the same time crude prices topping $100 a barrel, energy
producers are boosting liquids exploration to take advantage of
this trend. As a result of movement of rigs away from natural gas
towards oil, the tally of liquids-directed rigs has climbed to a
25-year high.
BAKER-HUGHES (BHI): Free Stock Analysis Report
CHESAPEAKE ENGY (CHK): Free Stock Analysis Report
CONOCOPHILLIPS (COP): Free Stock Analysis Report
DIAMOND OFFSHOR (DO): Free Stock Analysis Report
ENCANA CORP (ECA): Free Stock Analysis Report
HELMERICH&PAYNE (HP): Free Stock Analysis Report
NABORS IND (NBR): Free Stock Analysis Report
NOBLE CORP (NE): Free Stock Analysis Report
PATTERSON-UTI (PTEN): Free Stock Analysis Report
TRANSOCEAN LTD (RIG): Free Stock Analysis Report
TALISMAN ENERGY (TLM): Free Stock Analysis Report
ULTRA PETRO CP (UPL): Free Stock Analysis Report
EXXON MOBIL CRP (XOM): Free Stock Analysis Report
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