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BAS: High natural gas prices to stimulate US drilling count

By OGJ editors
HOUSTON, Apr. 3 -- The US drilling rig count continues to improve—and much ahead of normal seasonal levels—reported Banc of America LLC analyst James K. Wicklund in a recent research note.

"The drivers for domestic drilling activity, i.e., natural gas prices, also remain positive, and should provide the catalyst for continued growth," said Wicklund.

Wicklund noted that certain risks, including economic recession, geopolitical concerns, and greater-than-expected gas demand, could "lower the magnitude but not the direction" of this growth. "However, even with these risks, we firmly believe drilling activity should still increase at some level," he added.

History repeats itself
US drilling's upward trend will continue this year and into 2004, Wicklund said. "In each of the last two drilling up-cycles, the US rig count increased for 2 consecutive years before declining. And with spending from (exploration and production) companies expected to be up in 2003 vs. 2002 and 2004 vs. 2003, we expect this trend to continue."

Current prices, however "do not reflect a 2-year up-cycle," the analyst noted. "Current prices are discounting expectations of drilling activity only 4-6 months into the future. If today's prices were to reflect a 2-year activity up-cycle, they would need to be at least 30% higher just to remain in-line with historical full cycle multiples," he said.

Wicklund concluded in the Apr. 3 research note, that with the war continuing in Iraq, nobody is expecting to aggressively expand (drilling) commitments, adding, "But we would opportunistically add to positions during the war, with the idea of being overweight when the war is over."


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