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Why do Baker Hughes’ US natural gas rig counts keep dropping?

Kshitija Bhandaru

US rig counts rise: Oil rigs pass 1,500 while gas rigs drop again (Part 2 of 3)

(Continued from Part 1)

Natural gas rigs continue to fall, down to the lowest points of the year

Last week, Baker Hughes reported yet another reduction in the natural gas rig count. Gas rig counts decreased from 316 to 310—the lowest since the shale revolution. Natural rigs have fallen sharply over the past few months, as rig counts were at 372 at the beginning of 2014 and have declined by 62 to current levels of 310. As per the most recent report, the number of natural gas-directed rigs is at its lowest level since May 5, 1995, and is down 62% from its recent peak of 811, achieved in 2012. Baker Hughes stated on its latest earnings call that it anticipates that 2014 will exit with U.S. natural gas rigs drilling totaling ~360, somewhat above current levels.

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

Through 2014, natural gas rigs fell from 372 to 310, a drop of ~17%, with most of the decline from the Cana Woodford (-10), the Marcellus (-7), and other areas outside of the major classified plays (-20).

From a long-term perspective, natural gas rigs have been largely falling or remained flat since October 2011 in response to sustained low natural gas prices (see the natural gas price graph above). Low natural gas prices can spur 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). Despite the recent rally in natural gas prices, prices remain relatively low from a long-term historical context.

Service Company Halliburton noted, “Continued strength in natural gas prices could provide some upside potential, but we are not optimistic there will be a meaningful uptick in gas activities in the near-term.” However, if prices remain elevated or rally further, it’s possible that upstream energy names could be spurred to increase natural gas drilling activity.

Background: Why natural gas rigs keep falling but production continues to climb

As we discussed earlier, natural gas rigs have been falling since mid-2011. However, natural gas production has climbed since then. 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. So 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 and have also encouraged more drilling, as the cost per unit of production for such wells is very low and has made drilling them profitable. Given that 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 to Part 3

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