More natural gas drilling likely

Sam Fletcher
Senior Writer

A "higher-than-expected level of drilling" is likely in the near future since already robust activity has failed to stem declines in US natural gas production, say industry analysts.

US natural gas production has fallen on a year-to-year basis in 10 of the past 12 months reported (May 2004-April 2005), despite a double-digit increase in the number of rigs drilling for natural gas, said analyst W. Kevin Wood in a July 14 report from Susquehanna Financial Group LLLP in Bala Cynwyd, Penn.

"The average number of rigs drilling for natural gas increased 20% over the same period," he said. "The average US rig count is up 15% thus far in 2005, although we expect growth to moderate in the second half of the year following a strong activity increase in the second quarter."

Drilling for natural gas was particularly robust, with the US natural gas rig count up 7.8% sequentially in the second quarter vs. 2.7% growth in the first quarter, Wood said.

Despite recent declines in the number of rigs drilling exploration wells for natural gas, US gas exploration activity is still 55% higher than a year ago, said Paul Horsnell, an analyst with Barclays Capital Inc. in London.

The second quarter is often a period of gas demand and price weakness, said Bernard J. Picchi, senior managing director, Foresight Research Solutions LLC, New York. But this year strong demand drove natural gas prices to $6.95/MMbtu on the New York Mercantile Exchange, a record high for a second quarter, he said.

"Compelling drilling economics will likely justify significant increases in activity over the next several years," said J. Marshall Adkins in the Houston office of Raymond James & Associates Inc. in a July 11 report. "This trend appears most pronounced in the US, where record profitability for oil and gas producers and a very tight rig market has resulted in dramatically higher rig rates and a number of rig refurbishment and new-build project announcements."

Service companies benefit
Adkins said the stage is set for a significant and prolonged increase in drilling activity. "From an investment perspective, we believe that the oil service industry will be the prime beneficiary of this trend. In the near term, drilling contractors and rig-related manufacturing companies will likely see the most cash flow leverage to the capital dollars flowing into this sector," he said.

Basic market fundamentals for the oil field service industry improved steadily in the second quarter of this year. As a result, Wood expects service companies to realize sequential pricing gains of 1.5%. "We expect prices to be higher for nearly all oil field products and services, with the strongest gains for pressure pumping services, drillbits, and coiled tubing and wireline logging services," Wood said. Several oil field service companies already have initiated price increases in the second quarter, he said.

Wood cited recent data from the US Bureau of Labor Statistics that indicate pricing for oil field goods and services continues to rise. "The 'oil and gas support activities' component of the producer price index is on pace to increase 2% sequentially in the second quarter. Through the first 5 months of 2005, the index is up an average of 12.5% from a year earlier," he said.

Despite concerns among some observers that capacity additions would suppress pricing in the $9 billion pressure pumping market, Wood said, "Evidence suggests that the US pressure pumping market continued to tighten in recent months."

Canadian activity
The seasonal decline in Canadian drilling activity when the movement of rigs is restricted by the spring thaw appeared this year to be "milder than normal, despite comments to the contrary," Wood reported.

The number of Canadian rigs involved in conventional drilling declined by 51% to 246 this spring. The number of active workover rigs was down by 43% to 441 units. "We expected a 60% reduction in activity this season," Wood said. "Over the past 10 years, seasonal weather delays cut the conventional rig count by 52% and the workover rig count by 41% in the second quarter."

He noted that several oil field service providers had reported that wet weather contributed to a slower-than-normal return to drilling activity in Canada after the thaw. "However, rig counts suggest drilling activity returned at normal levels. In fact, average conventional and workover rig counts were at record levels for the second quarter and up 32 rigs and 21 rigs, respectively, year over year," Wood said.

(Online July 18, 2005; author's e-mail: samf@ogjonline.com)


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