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Natural gas production growth untamed despite fewer rigs

US rig count dips again after a breather (Part 10 of 11)

(Continued from Part 9)

Natural gas production

Since mid-2011, natural gas production has increased, even though there are fewer natural gas-targeted rigs in operation. In February 2015, the US Energy Information Administration (or EIA) released its report Short-Term Energy Outlook. The report noted that dry natural gas production is set to increase to 72.80 billion cubic feet (or Bcf) per day in 2015 and to 74.38 Bcf per day in 2016. In 2014, the EIA expects the US to produce 70.17 Bcf per day of dry natural gas.

EIA findings

As a point of reference, the EIA believes natural gas production averaged an estimated ~69.3 billion Bcf per day during the first half of 2014. In keeping with this trend, US dry natural gas production surged 5% in December 2014 over the previous month.

In contrast, the number of natural gas rigs has continued to decline over the past three years. From ~930 in October 2011, the count is now down to ~268 as of March 6, 2015.

The EIA’s preliminary numbers show that natural gas production growth is set to continue into 1Q15, driven by higher production in the Marcellus Shale, Eagle Ford Shale, and Utica Shale. Some key energy companies that expect to benefit from higher production in these shales include DVN Energy (DVN), EOG Resources (EOG), Cabot Oil & Gas (COG), and Pioneer Natural Resources (PXD).

For broader exposure to the energy market, investors might consider the Energy Select Sector SPDR ETF (XLE). DVN Energy and EOG Resources together comprise 3.3% of XLE’s total market capitalization.

A counterintuitive trend

A number of factors combined to develop this trend. First, while companies targeted oil because it’s more profitable, most oil wells also have significant natural gas production. So, increased oil-targeted drilling has contributed to higher levels of natural gas production.

The declining number of oil-targeted rigs in the past four months should eventually lead to lower natural gas production. However, it may take a few quarters before any noticeable decrease occurs.

Another contributing factor is the development of super-prolific areas like the Marcellus Shale. Wells in the best areas of these plays have extremely high natural gas production rates. They also have very low costs per unit of production. These factors make it profitable to drill them—even when gas prices are low.

Continue to Part 11

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