TLM

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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