Why natural gas rig counts declined in the past week

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Must-know: Why investors should monitor rig count figures (Part 2 of 3)

(Continued from Part 1)

Natural gas rig counts slipped last week as year-to-date counts remains significantly lower

On July 4, Baker Hughes reported that natural gas rig counts went down by three for the week, from 314 to 311.

Natural gas prices throughout 2014 are up significantly from last year, with 1Q14 prices averaging $4.64 per million British thermal units (or MMBtu) compared to the 2013 average price of $3.73 per MMBtu—using the front month contract for Henry Hub natural gas. Currently, natural gas is trading at around ~$4.20 per MMBtu. However, natural gas rigs have decreased throughout 2014. At the beginning of this year, natural gas rigs drilling totaled 372. The current natural gas rig count of 311 represents a drop of 61, or ~16%. Most of the decline in natural gas rigs came from the Eagle Ford at -18, Cana Woodford at -14, and other areas outside of the major classified plays at -23.

Natural gas rigs have fallen due to low prices and higher efficiencies

The drop in natural gas rigs year-to-date (or YTD) represents the continuation of a trend that has been ongoing since late 2011, when natural gas rigs topped 900. The drop has been driven by sustained low natural gas prices. Low natural gas prices can cause producers to stop drilling for natural gas because the economics of drilling natural gas wells becomes less and less attractive with lower natural gas prices.

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). Despite the recent rally in natural gas prices, prices remain relatively low from a long-term historical context.

Regarding U.S. natural gas drilling activity, Baker Hughes commented on its 1Q14 earnings call, “Taking a look at natural gas, U.S. working gas in storage is currently one trillion cubic feet below the five-year average. Getting storage levels back to average before next winter’s drawdown, would require an addition of another three trillion cubic feet of gas. And that sort of addition would require injection levels to approach record levels every week between now and then. With gas storage at this level, prices are higher than many would have guessed only a few months ago. When coupled with favorable oil prices, this environment fares well for our customers’ cash flow and spending capacity.”

As we discussed earlier in this series, natural gas rigs have been falling since mid-2011. However, natural gas production has increased since then. The U.S. Energy Information Administration (or EIA) reported that for March, 2014, natural gas production—wet gas including natural gas liquids (or NGLs)—totaled 72.7 billion of cubic feet (or bcf) per day. Throughout 2013, natural gas production averaged around 70.2 bcf per day.

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. The increase in oil-targeted drilling has helped 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. The wells have also encouraged more drilling because the cost per unit of production for such wells is very low and has made drilling them profitable. Since natural gas production continues to climb despite declining-to-flat natural gas-targeted activity, natural gas rig counts will likely remain around current lows.

Continue reading the next section of this series to learn about the latest oil rig counts.

Continue to Part 3

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