OFS firms hope Haynesville rebound won’t wait for LNG wave

By Joseph Gyure, Editor, Enverus Intelligence

December 6, 2023

While the Haynesville has been responsible for much of 2023’s woes for U.S. oilfield services contractors, they appear convinced that the worst is over. Still, no one expects a full rebound until new LNG export capacity on the U.S. Gulf Coast comes online.

The Ark-La-Tex active rig count was over 80 for most of 2H22 and 1Q23. However, throughout 2H23, activity has been stuck in a 50- to 60-rig range. Meanwhile, the EIA reported that just 43 wells were completed in the Haynesville in October, down by 19 from last December’s peak.

The chief culprit in both boom and bust has been natural gas prices. The gas-rich region was riding high for most of 2022 and early 2023 amid inflation and supply concerns after the Russian invasion of Ukraine. The Henry Hub front-month spent most of 2022 above $6.00/MMBtu.

However, the global supply crunch failed to materialize, and the winter was warmer than usual. The price bubble popped early this year with Henry Hub closing below $3.00/MMBtu every day but one from February through September.

Commodity “prices are bouncing around, and natural gas is just awful,” an Ark-La-Tex driller told the Enverus Day Rate survey team in October. While prices finally started peeking above $3.00/MMBtu in October, bears are holding onto the near curve, currently keeping prices under $3.00 through the upcoming winter.

The Haynesville’s woes can be seen in its drilling day rates. The composite Ark-La-Tex day rate stood at $24,447 in October, down $134 from September, according to the Enverus Day Rate survey. Since May, the Ark-La-Tex composite has fallen $1,129, the worst decline in any of the survey’s seven regions.

Ark-La-Tex composite day rate has fallen more than any other region’s since May.

These factors gave CEOs at U.S.-focused OFS contractors a lot to chew on as they discussed Q3 results. However, they all seemed to reach the same conclusion on the Haynesville and other gas plays: short-term bearish, long-term bullish.

“We expect the Haynesville to remain relatively muted until at least later in 2024,” Independence Contract Drilling CEO Anthony Gallegos said during a Nov. 1 earnings call. “In the near term, I think the impending winter withdrawal season will determine Haynesville activity levels in the first half of 2024.”

However, winter will need to be a humdinger to deplete gas stockpiles enough to spur activity. U.S. natural gas stocks held 3,836 Bcf on Nov. 24, 8.6% higher than the five-year average, according to the EIA.

Upcoming LNG export projects provide the most reason for optimism for the Haynesville and the U.S. gas market. The largest boost will come from Golden Pass LNG, which is owned by ExxonMobil and QatarEnergy and scheduled to enter service in 2H24. The facility in Jefferson County, Texas, will have 18.1 mtpa of capacity. Not far behind will be Stage 3 of the Corpus Christi LNG export facility on the Texas Gulf Coast, which will produce more than 10 mtpa with the addition of seven trains, and Venture Global LNG’s 10 mtpa Plaquemines LNG Phase 1 on the Louisiana coast.

 “Several large LNG projects along the Gulf Coast will support drilling activity for gas, especially in the Haynesville,” Nabors Industries CEO Tony Petrello said during an Oct. 28 earnings call, which he believes will spur higher prices, forming a “favorable backdrop for operator economics. However, the combination of operator capital discipline and consolidation could temper the scale-up in U.S. activity that we have normally seen at these higher prices.”

In its latest Fundamental Edge report, Enverus Intelligence® | Research forecasts that Haynesville production will need to increase 3.3 Bcf/d or 21% in 2025 to meet the growth in LNG demand. Add gas-fired generation requirements, and the U.S. will need a total of 7 Bcf/d in additional supply in 2025-2026, EIR said.

Even though there will be demand, higher Nymex prices will be required in 2025-2026 to spur the supply. EIR also believes that consolidation and capital discipline will sap operators’ willingness to ramp up production. EIR projects 2025-2026 gas prices of $5/MMBtu, higher than the current forward curve around $4/MMBtu. For 2024, EIR expects gas prices around $2.50-$3.00 in the summer and $3.00-$3.50 in the winter based on its assessments of the YE23 storage level and breakeven economics.

Despite LNG wave, EIR says gas prices of $5 needed to attract operators

Patterson-UTI doesn’t think increased activity will need to wait for LNG demand. “We believe the shape of the forward strip is telling us that there needs to be more activity in the gas basins just to meet current natural gas demand,” CEO Andy Hendricks said in a Nov. 8 earnings call. “In short, we remain optimistic for both the drilling and completions markets, given current commodity prices and the view that we will need a modest increase in U.S. shale oil and natural gas production over the next several years.”

Liberty Energy believes that frac activity in natural gas could tick up as early as 2Q24 but “people, I think, are wisely more waiting for the right market signals,” CEO Chris Wright said in an Oct. 19 earnings call. Liberty is the leading fracker in Louisiana with eight of the state’s 11 active frac crews, according to Enverus Energy Analytics projections.

EIR’s Fundamental Edge report is more bearish on 2024 activity. Its projections for total Haynesville wells turned in line expects a roughly 15% drop in 2024 after a 2023 that will come in flat YOY. The dip will be more than offset in 2025 by a 50% increase from 2024 totals.

Regardless of when the activity revival occurs, a drilling day rate revival could be slow to materialize. While the number of active rigs in the Haynesville have plummeted, there “hasn’t been a lot of capacity move-out,” Gallegos said during Independence’s earnings call. With “a lot of capacity on the sidelines,” ICD expects pricing in the Haynesville to “remain more challenging than the Permian, even against the backdrop of recharged capital budgets for 2024. But we’re very bullish in the long term,” he said.