Why falling gas rig counts aren’t denting natural gas production

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Falling gas rig counts aren’t impacting natural gas production

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

The U.S. Energy Information Administration (or EIA)—in its Short-Term Energy Outlook released in August, 2014—reported that dry natural gas production is expected to total 69.6 billion cubic feet (or bcf) per day in 2Q14.

Nat gas production and rigs

For example, throughout 2013, dry natural gas production averaged ~66.5 bcf per day. For 1Q14, dry natural gas production averaged ~68.1 billion bcf per day.

Preliminary data collected by the EIA has shown that the increase in the production trend has continued for June and July. The increase in production is driven by higher production in the Marcellus Shale.

A counterintuitive trend

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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. The wells also have very low costs per unit of production. This makes drilling the wells profitable even at low gas prices.

Key stocks and exchange-traded funds (or ETFs)

Natural gas rigs drilling can indicate the sentiment of major natural gas producers like Pioneer Natural Resources (PXD), Devon Energy Corporation (DVN), Concho Resources (CXO), and Hess Corporation (HES).

Many of these producers are also part of energy ETFs like the Energy Select SPDR ETF (XLE).

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