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 both oil and natural gas-directed rigs. In
particular, the natural gas rig count dropped for the eleventh time
in as many weeks, to touch a new 10-year low.
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 1,968 for the week ended March 23,
2012. This was down by 16 from the previous week’s count and
represents the fifth decrease in 8 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 1,738. 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 21 to 1,899, inland
waters activity increased by 2 to 23, while offshore drilling was
up by 3 to 46 rigs.
Natural Gas Rig Count: The natural gas rig
count decreased for the eleventh week in a row to 652 (a drop of 11
rigs from the previous week). As per the most recent report, the
number of gas-directed rigs is at their lowest level since May 3,
2002 and is down more than 30% from its 2011 peak of 936, reached
during mid-October.
The current natural gas rig count remains 59% below its all-time
high of 1,606 reached in late summer 2008. In the year-ago period,
there were 880 active natural gas rigs.
Oil Rig Count: The oil rig count – which hit a
25-year high of 1,317 last week – was down by 4 to 1,313.
Nevertheless, the current tally is way above the previous year’s
rig count of 851. It has recovered strongly from a low of 179 in
June 2009, rising more than 7.3 times.
Miscellaneous Rig Count: The miscellaneous rig
count (primarily drilling for geothermal energy) at 3 was down by 1
from the previous week.
Rig Count by Type: The number of vertical
drilling rigs fell by 13 to 563, 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 3 at 1,405. 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 1,174.
To Conclude
As mentioned above, the natural gas rig count has been falling
since the last few weeks, 282 rigs in fact (or 30%) 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
50% from benchmark levels.
Hamstrung by this huge and sharply widening surplus, natural gas
prices have dropped over 50% from 2011 peak of $4.92 per million
Btu (MMBtu) in June to the current level of around $2.40 (referring
to spot prices at the Henry Hub, the benchmark supply point in
Louisiana). Incidentally, prices hit a 30-month low of $2.01
earlier this month.
To make matters worse, a near-record mild weather across most of
the country curbed natural gas demand for heating all winter,
leading to an early beginning for the stock-building season. The
grossly oversupplied market 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 is hovering just below the 25-year high hit
during the previous week.
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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