Why November’s natural gas rig counts were up despite low prices

Market Realist

Why US rigs counts are up despite a predicted decline (Part 3 of 3)

(Continued from Part 2)

Natural gas down slightly last week, but up through November

Baker Hughes, an oilfield services company, reported that rigs targeting natural gas decreased last week, to 367 from 369 for the week ending November 29. For the month of November, natural gas rigs drilling rose by seven, with notable additions in the Cana Woodford, Marcellus, Permian, and Utica plays. Quarter-to-date, natural gas rigs have declined by 9, mostly from the Eagle Ford, Mississippian, and Granite Wash.

Natural gas rigs predicted to decline in 4Q13, but natural gas rigs have remained higher than expected

On Baker Hughes’ (BHI) 3Q13 earnings call, management noted that it expects natural gas rigs in 4Q13 to average 340, about 10% lower than current levels, 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. However, given natural gas rig activity through 4Q13 (average of 370 quarter-to-date), it’s likely that the average for the quarter will be higher than 340. Rigs were expected to decline due to normal winter seasonality. Plus, natural gas prices have remained low, providing little incentive to drill for more gas.

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.

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), as more natural gas rigs put to work represents more dollars spent on drilling natural gas. Many natural gas producers are components of energy ETFs such as the SPDR S&P Oil & Gas Exploration ETF (XOP). Note that currently, natural gas prices remain low, so there isn’t incentive to put more capital to use to drill for a commodity that sells at such a cheap price.

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