<

Why you should monitor record-breaking horizontal rig counts

Part 6
Why you should monitor record-breaking horizontal rig counts (Part 6 of 6)

Why natural gas production is rising despite falling gas rig counts

Natural gas production rises but gas-targeted rigs fall

Since mid-2011, natural gas production has increased even though the number of natural gas–targeted rigs has fallen.

The U.S. Energy Information Administration (or EIA), in its Short Term Energy Outlook released in July 2014, reported that for 1Q14, dry natural gas production totaled 68.1 billion of cubic feet (bcf) per day. For reference, throughout 2013, dry natural gas production averaged around 66.5 bcf per day.

Nat gas production and rigsEnlarge Graph

The drop has been driven by sustained low natural gas prices. Low natural gas prices can cause producers to stop drilling for natural gas because the economics of drilling natural gas wells becomes less and less attractive with lower natural gas prices.

Nat Gas priceEnlarge Graph

While natural gas prices throughout 2014 are up from last year, with 1H14 prices averaging $4.60 per million British thermal units (or MMBtu) compared to the 2013 average price of $3.73 per MMBtu, they’re still lower than historical levels given the strong supplies of gas from the horizontal drilling and hydraulic fracturing induced shale boom in the U.S. Currently, natural gas is trading at around ~$3.96 per MMBtu.

A counterintuitive trend

This trend has also been forming due to a combination of other factors. First, while companies have increasingly targeted oil because it’s more profitable, most oil wells also have significant natural gas production. 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 these plays have extremely high natural gas production rates and also have very low costs per unit of production. This makes drilling them profitable even at low gas prices.

Key stocks and ETFs

Natural gas rigs drilling can show you the sentiment of major natural gas producers, like Pioneer Natural Resources (PXD), Devon Energy Corporation (DVN), Concho Resources (CXO), and Range Resources (RRC).

Many of these names are also part of energy exchange-traded funds (or ETFs) like the Energy Select SPDR ETF (XLE).

The Realist Discussions