In its weekly release, Houston-based oilfield services company
Baker Hughes Inc. (BHI) reported
a rise in the U.S. rig count (number of rigs searching for oil and
gas in the country). This can be attributed to an increase in the
tally of both oil and natural gas-directed rigs. In particular, the
natural gas rig count climbed for the first time after 11
consecutive weeks of decline, while the oil rig count scaled
another record high.
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 1,979 for the week ended March 30,
2012. This was up by 11 from the previous week’s count and
represents the fourth increase in 7 weeks.
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 1,776. 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 climbed by 11 to 1,910, while
inland waters activity and offshore drilling remained steady at 23
and 46, respectively.
Natural Gas Rig Count: The natural gas rig
count – which recently slumped to a 10-year low – increased for the
first time in 12 weeks to 658 (a gain of 6 rigs from the previous
week). Despite the weekly improvement, the number of gas-directed
rigs is down approximately 30% from its 2011 peak of 936, reached
during mid-October.
In fact, 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 891 active natural gas rigs.
Oil Rig Count: The oil rig count was up by 5 to
1,318. 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 877. It has recovered strongly
from a low of 179 in June 2009, rising almost 7.4 times.
Miscellaneous Rig Count: The miscellaneous rig
count (primarily drilling for geothermal energy) at 3 remained
unchanged from the previous week.
Rig Count by Type: The number of vertical
drilling rigs rose by 3 to 566, 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 up by 8 at 1,413. In particular,
horizontal rig units – that reached an all-time high of 1,185 in
January this year – rose by 6 from last week’s level to 1,180.
To Conclude
Notwithstanding the modest gain registered by the natural gas
drilling activity over the last week, it is still down by 276 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
59% above the benchmark five-year average levels.
Hamstrung by this huge and sharply widening surplus, natural gas
prices have dropped approximately 56% from 2011 peak of $4.92 per
million Btu (MMBtu) in June to the current level of around $2.15
(referring to spot prices at the Henry Hub, the benchmark supply
point in Louisiana). Incidentally, prices hit a 30-month low of
$2.01 in March.
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 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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