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 only the fourth time in 2012, 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 1,986 for the week ended May 18,
2012. This was up by 12 from the previous week’s count and
represents the third increase in as many 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 1,830. 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 10 to 1,917, while
offshore drilling was up by 2 to 47 rigs. Meanwhile, inland waters
activity remained steady at 22 units.
Natural Gas Rig Count: The natural gas rig
count – which recently slumped to a 10-year low – increased for
just the third time in 19 weeks to 600 (a gain of 2 rigs from the
previous week). Despite the weekly improvement, the number of
gas-directed rigs is down approximately 36% from its 2011 peak of
936, reached during mid-October.
In fact, the current natural gas rig count remains 63% below its
all-time high of 1,606 reached in late summer 2008. In the year-ago
period, there were 866 active natural gas rigs.
Oil Rig Count: The oil rig count was up by 10
to 1,382. 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 954. It has recovered
strongly from a low of 179 in June 2009, rising more than 7.7
times.
Miscellaneous Rig Count: The miscellaneous rig
count (primarily drilling for geothermal energy) at 4 remained
unchanged from the previous week.
Rig Count by Type: The number of vertical
drilling rigs rose by 7 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 5 at 1,420. In particular,
horizontal rig units rose by 6 in the latest week to hit a new
all-time high of 1,193.
To Conclude
Notwithstanding the modest gain registered by the natural gas
drilling activity over the last week, it is still down by 334 rigs
(or 32%) 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 at its
all-time high, output from these fields remains robust. As a
result, gas inventories remain at elevated levels – up some 40%
above the benchmark five-year average levels.
Hamstrung by this huge surplus, natural gas prices have dropped
approximately 45% from 2011 peak of $4.92 per million Btu (MMBtu)
in June to the current level of around $2.70 (referring to spot
prices at the Henry Hub, the benchmark supply point in Louisiana).
Incidentally, prices hit a 10-year low of $1.82 during late
April.
To make matters worse, a near-record mild weather across most of
the country curbed natural gas demand for heating, 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 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
trading in the $90–$100 a barrel range, 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 another 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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