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Natural gas rigs have been flat, but higher prices could drive activity

Ingrid Pan, CFA

What rig counts signal about drilling sentiment (Part 3 of 3)

(Continued from Part 2)

Natural gas rigs fell last week

Baker Hughes, an oilfield services company, reported that rigs targeting natural gas increased last week, to 372 from 369 for the week ending December 20. Over the past few months, natural gas rig counts have been roughly range-bound between 360 and 380.

Natural gas rigs were forecasted to decline in 4Q13

On Baker Hughes’ (BHI) 3Q13 earnings call, management noted that it expected natural gas rigs in 4Q13 to average 340, about 9% 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. Lastly, producers are becoming more efficient at drilling for natural gas with fewer rigs, which also may be keeping rig counts depressed. However, given that natural gas rigs drilling quarter-to-date have averaged ~370, the 4Q13 average is likely to be significantly higher than 340.

Natural gas prices, while still low, have had a strong rally recently

While natural gas prices remain low from a long-term context at around ~$4.40 per MMBtu, the commodity has had a strong rally in recent months. Natural gas had been trading at around ~$3.50 per MMBtu in early October, and prices have increased ever since to reach current levels around ~$4.40 per MMBtu. If prices continue to rally, it could incentivize some producers to increase natural gas drilling activity.

Altogether, though, with natural gas currently trading around ~$4.20 per MMBtu, there isn’t much of a catalyst for natural gas activity to pick up significantly from current levels, as it remains a relatively low price from a long-term perspective.

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. Falling gas prices can lead producers to stop 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).

While natural gas prices are low from a long-term perspective, they have rallied strongly over the past few months. If prices continue to rally (see Why natural gas prices continued to creep up), natural gas drilling activity may increase.

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