Why natural gas rig counts remain flat over the medium term

Market Realist

Why rig counts in 4Q13 averaged higher than forecast (Part 3 of 3)

(Continued from Part 2)

Natural gas rigs rose slightly last week, but they’ve been flat over the medium term

Baker Hughes, an oilfield services company, reported that rigs targeting natural gas rose slightly last week, to 374 from 372 for the week ending December 13. Over the past few months, natural gas rig counts have been roughly rangebound between 360 and 380.

Natural gas rigs didn’t decline as much as forecast in 4Q13

On Baker Hughes’s (BHI) 3Q13 earnings call, management noted that it expects natural gas rigs in 4Q13 to average 340, with the drop in rigs due both to normal seasonality in winter months and increased efficiency allowing upstream names to produce more with fewer rigs. Natural gas rigs drilling actually averaged 370, compared to the forecast of 340 and the 3Q13 average natural gas rig count of 380. One factor that may have helped to support natural gas rig counts is that natural gas prices had a strong rally over 4Q13, rising from ~$3.50 per MMBtu in late September to current prices of ~4.40 per MMBtu. For more on natural gas prices, see Why natural gas prices have rallied over the past few weeks.

Background: Natural gas rigs have fallen sharply over the past few years, also due to low prices

From a longer-term perspective, natural gas rigs have been largely falling or flat since October 2011 in response to sustained low natural gas prices (see the natural gas price graph below). Falling gas prices can halt producers from 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 continue to rally or producers can significantly lower cost curves even further, that could be an impetus for natural gas rigs and natural gas drilling to increase.

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