GAS PRODUCERS HOPE FOR LONG, COLD WINTER
Gas producers hope for long, cold winter
Recent drop in rig counts could augur firmer prices
David Pett, Financial Post Published: Tuesday, November 18, 2008
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A cold winter remains key, but the recent fall in U. S. rig counts could be an added trigger to a rebound in natural gas prices, says First Energy Capital analyst Kevin Lo.
"The large drop in the U. S. rig counts suggests an eventual reduction in natural gas production is pending," Mr. Lo said in a note to clients. "This sets the stage for the downward rebalancing of supply in natural gas."
Last week, rig counts across the border dropped to 1,941 rigs, representing a drop of 54 rigs from the previous week, according to the latest Baker Hughes survey of U. S. drilling activity.
While Mr. Lo noted that part of the reduction was due to an increase of 34 oil-based rigs the week before, he told clients the results are important for the 41 rig declines reported. Not only is it tied for the largest decline in a decade, it also comes on the heels of a 13-rig decline earlier in the month.
"What's more, the rigs being laid down are the equipment in Texas (down 23) and Louisiana (13), two areas that have been drilling heavily for unconventional natural gas, which has been the growth engine for the Lower 48," the analyst wrote.
He pointed out that there has only been two other times this decade that U. S. rig counts have fallen to these low levels. In January, 2008, the week-over-week rig count decreased by 41 rigs and in November, 2001, the count dropped by 40 rigs.
Mr. Lo told clients that natural gas stocks experienced a substantial increase from the day that the rig count bottomed at these levels. For example, shares in natural gas producer EnCana Corp. (ECA/ TSX) jumped 14% from Nov. 9, 2001 to June 28, 2002. Ensign Energy Services Inc. (ESI/ TSX), another bellwether natural gas stock, jumped 29% over the same period.
In the months to come, the First Energy Capital analyst predicts a further drop in rig counts as capital programs slow. "Many of these companies are not only doing this due to a decline in commodity prices, but also because of the lack of capital in the system. From a high of 1,606 gas rigs in August of this year, the number could fall to 1,200 to 1,400," Mr. Lo said.
He added that a rally in natural gas prices, which have dropped in half since the summer, remains highly dependent on a long, cold winter. In October, Environment Canada cautiously predicted a milder winter than last year. The analyst said natural gas producers would likely benefit immediately from a more positive outlook on natural gas pricing, while natural gas services companies will benefit longer term from pricing power due to higher prices from gas.
dpett@nationalpost.com
Recent drop in rig counts could augur firmer prices
David Pett, Financial Post Published: Tuesday, November 18, 2008
Related Topics
A cold winter remains key, but the recent fall in U. S. rig counts could be an added trigger to a rebound in natural gas prices, says First Energy Capital analyst Kevin Lo.
"The large drop in the U. S. rig counts suggests an eventual reduction in natural gas production is pending," Mr. Lo said in a note to clients. "This sets the stage for the downward rebalancing of supply in natural gas."
Last week, rig counts across the border dropped to 1,941 rigs, representing a drop of 54 rigs from the previous week, according to the latest Baker Hughes survey of U. S. drilling activity.
While Mr. Lo noted that part of the reduction was due to an increase of 34 oil-based rigs the week before, he told clients the results are important for the 41 rig declines reported. Not only is it tied for the largest decline in a decade, it also comes on the heels of a 13-rig decline earlier in the month.
"What's more, the rigs being laid down are the equipment in Texas (down 23) and Louisiana (13), two areas that have been drilling heavily for unconventional natural gas, which has been the growth engine for the Lower 48," the analyst wrote.
He pointed out that there has only been two other times this decade that U. S. rig counts have fallen to these low levels. In January, 2008, the week-over-week rig count decreased by 41 rigs and in November, 2001, the count dropped by 40 rigs.
Mr. Lo told clients that natural gas stocks experienced a substantial increase from the day that the rig count bottomed at these levels. For example, shares in natural gas producer EnCana Corp. (ECA/ TSX) jumped 14% from Nov. 9, 2001 to June 28, 2002. Ensign Energy Services Inc. (ESI/ TSX), another bellwether natural gas stock, jumped 29% over the same period.
In the months to come, the First Energy Capital analyst predicts a further drop in rig counts as capital programs slow. "Many of these companies are not only doing this due to a decline in commodity prices, but also because of the lack of capital in the system. From a high of 1,606 gas rigs in August of this year, the number could fall to 1,200 to 1,400," Mr. Lo said.
He added that a rally in natural gas prices, which have dropped in half since the summer, remains highly dependent on a long, cold winter. In October, Environment Canada cautiously predicted a milder winter than last year. The analyst said natural gas producers would likely benefit immediately from a more positive outlook on natural gas pricing, while natural gas services companies will benefit longer term from pricing power due to higher prices from gas.
dpett@nationalpost.com
Views: 37
Replies to This Discussion
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Permalink Reply by Skip Peel - Mineral Consultant on
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Okay, members. I confess. Sometimes I post articles that I find of interest using their less than compelling titles just to see if anyone finds certain facts of interest. In this one, it's not that cold weather tends to increase ng prices. It's that drops in rig counts do. And in this case, the significant drops are in LA. and TX.
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Permalink Reply by jffree1 on
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Should we anticipate a further drop in rig count (and corresponding increase in NG price) as the credit dependent and under-capped begin to fall by the wayside and/or be absorbed by those in a better cash position? Short term, isn't this a good thing for the producers who are left, after the re-shuffle?
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Permalink Reply by Keith Mauck (Site Publisher) on -
I wonder if this will have any affect in the ability of the producer to get land drilled within the primary term of these contracts? I seems like it would.
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Permalink Reply by Skip Peel - Mineral Consultant on
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jffree. I think the rig count will continue to drop into the new year. And that will positively impact the price of ng and therefore the stock of HS operators. If the tight credit market loosens, the drop should be short term. And operators with cash in the new year will invest it in development of the leasehold accumulated '06 through '08. If ng prices remain strong into the early spring, even the operators short on cash, but with sufficient cash flow, will invest in developing their leasehold. Most will have no choice. The clock is running on 3/5 year lease terms (many acquired in '06 and '07) and there is only so many drilling rigs available. The rigs dropped during the downturn will be quickly back to work under contract to those operators. The real question, for many members, is will aggressive acquisition of leasehold ramp back up. Boosting lease bonuses back to their previous boom levels. I do not think that will happen. Much of the prospective acres in the play have been accounted for. Opportunities may still exist for isolated land/mineral owners with meaningful acreage positions in desirable locations. But, IMO, the bonus offers will remain in a range from $1,000 to $5,000/acre for most. If you read my blog post, "Haynesville Shale E&P Companies By Net Acreage Positions", it is becoming evident that there is little in the way of unleased, contiguous acreage remaining. Barring a dramatic increase in the boundaries of the play.
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Permalink Reply by BirdDawg, plain ole' idiot on
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Skip,
I think the drop in rig count will help NG prices. Maybe coupled with a cold winter may help it more. Just say that both instances occur, and maybe we get short on NG. I know i am being optimistic, but lets look at the possibilities. Where can more gas be produced quicker than any other area? The Haynesville Shale. But wait a minute, we ain't got the pipelines to get the gas out. We have cancelled those jobs. So what now? Back in the same boat. I think we need involvement from some majors, (if we can get it). Things are not going to stay this way forever, but we still need some companies to have us set up when the time comes. And this dang sure is not Chk or HK. CHK has done nothing but play the mineral owners for all that they are worth. And in the process, play CHK for more than they are worth. See where we are now?
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Permalink Reply by sesport on
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And this doesn't compare with what CPK & PHK projected their rig/well counts to be by 2010, does it?? How does this count compare when put side by side with applicatons & permits?
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Permalink Reply by Skip Peel - Mineral Consultant on
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sesport. I think that the number of rigs projected to be employed in the HS play by CHK and HK are no longer applicable. Those announcements represented intentions at the time they were publicized. And meant to some degree to drive investor expectations of future development and thus stock value. The new reality is that neither can afford to meet those expectations. And both companies will concentrate on cash flow (through production) to fund their continuing development. Short of a drastic turn around in the credit market, both are up against the clock. And they must focus on drilling the leasehold they currently hold. If they are not selling off leasehold, the only way they will continue to apply for new drilling units is by JV agreements with companies that recognize the technical expertise that both companies hold.
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Permalink Reply by sesport on
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I realized then that the projected number was a little inflated, they would have had to be drilling about 2 wells/month. We don't have the delivery pipeline in place, the rigs available weren't there, then the Chinese cement was a bust (casings). Also, there is still a large chunk of somewhat contiguous property unleased, the property that SCC is working to get leased.
Don't know what this winter holds for colder states, but I was in western NY last Dec. and it was mild even for my LA blood. Lake Erie hasn't frozen over in a few years. We'll see, prices will be a matter of demand & supply I guess.
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Permalink Reply by Skip Peel - Mineral Consultant on
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sesport. Yes, the SCC probably represents the only remaining contiguous unleased acres in the core area of the play. And I'm not betting on any significant bump in ng prices from seasonal weather conditions. The decline in operated rigs is a precursor of a decrease in supply. Though HS operators will have to produce to maintain cash flow and fund development, falling prices in other regions and fields will constrain supply. The Barnett Shale production is predicted to peak in '09 and the begin to decline. Other shale plays have slowed significantly. I read an online report on the Marcellus Shale leasing activity today. The writer speculated that the high bonus offers of the summer were gone for good. The writer said that offers of $500 to $1,000 per acre would not be seen again.
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Permalink Reply by sesport on
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Sure would be nice for ng prices if we could jump start that NG vehicle production & purchase. Especially if more fleets, city buses, school buses were to convert.
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Permalink Reply by Skip Peel - Mineral Consultant on
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I'm working on it.
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Permalink Reply by Wolverine on
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About the rig counts!!! Y r they dropping!!! I thought the more rigs u have the better-N- more gas u would be able to get out!!! Guess the economy is that bad!!! If it is that bad!!! Then hopefully at the first of the yr!!! It'll be better!!! So, everything can resume as schedule!!! Because, I am all for the NG vehicles, etc.
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