By Ingrid Pan, CFA 7 hours ago
Posted on 02/24/2014 12:55:12 PM PST by ckilmer
Why oil rig counts keep climbing while natural gas rigs drop (Part 3 of 3)
Natural gas rigs continued to drop last week, down 9% since the beginning of 2014
Baker Hughes, an oilfield services company, reported that rigs targeting natural gas dropped last week, from 351 to 337 for the week ended February 14, 2014. Natural gas rigs are down by 35 since the beginning of the year, a decrease of ~9%. Note that Baker Hughes anticipates that 2014 will exit with U.S. natural gas rigs drilling totaling ~360, close to current levels.
Background: Natural gas rigs have fallen sharply over the past few years due to low prices
Through 2013, natural gas rigs fell from 439 to 372, a drop of 15%. Natural gas rigs fell most in the Marcellus Shale (-11), the Granite Wash (-19), the Barnett Shale (-12), and the Fayetteville Shale (-4). Natural gas rigs rose most in the Mississippian (+8) and the Utica Shale (+15).
From a long-term perspective, natural gas rigs have been largely falling or remained flat since October 2011 in response to sustained low natural gas prices (see the natural gas price graph below). Low natural gas prices can spur producers to stop drilling for natural gas.
Natural gas rigs drilling can indicate the sentiment of major natural gas producers such as Chesapeake Energy (CHK), Comstock Resources (CRK), Southwestern Energy (SWN), and Range Resources (RRC). Many of these names are also part of energy ETFs such as the S&P Oil & Gas Exploration & Production ETF (XOP). If prices rally significantly or producers can significantly lower the cost curves even further, then that could be an impetus for natural gas rigs and natural gas drilling to increase. Despite the recent rally in natural gas prices (see Why natural gas prices soared last week to close at $5.21 per MMBtu), prices remain relatively low from a long-term historical context, and producers are not likely to increase natural gas drilling on seasonal rather than secular trends. Service companies such as Halliburton noted, “Continued strength in natural gas prices could provide some upside potential, but we are not optimistic there will be a meaningful uptick in gas activities in the near-term.”
Background: Why natural gas rigs keep falling but production continues to climb
As we discussed earlier, natural gas rigs have been falling since mid-2011. However, natural gas production has climbed since then. This trend has been due to a combination of several factors. First, while rigs targeting natural gas have declined, oil drilling has remained active. While companies have targeted oil, most oil wells also have significant natural gas production. So the increase in oil-targeted drilling has helped to contribute to natural gas production. Another factor contributing to the increase is the development of super-prolific areas such as the Marcellus Shale. Wells in the best areas of the Marcellus Shale have extremely high natural gas production rates, which have contributed to the supply by being so prolific and have also encouraged more drilling, as the cost per unit of production for such wells is very low and has made drilling them profitable. Given that natural gas production continues to climb despite declining-to-flat natural gas–targeted activity, natural gas rig counts will likely remain around the current low levels.
fyi
1. Price of gas is low compared to oil. Much more profitable to drill for oil.
2. There is plenty of casing head gas being produced by oil wells, so there is ample gas supply generated due to oil production.
3. Related to 1: the PV10 on most dry gas wells make drilling uneconomic.
Pipelines can’t keep up. Can’t drill a well, bring into production without a way to get it to market. Most, but not all Marcellus players moved west to the wet gas in the Utica shale. Marcellus is dry gas, less by products to sell. When prices stabilize and the pipes catch up more wells will be completed.
Our’s is up and it’s wet but we’re reaching max sell line pressures, 2 of my sell lines are running 55lb static pressure and that makes me nervous. Don’t like my seperators going over 60 psi.
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