Why falling rig counts aren’t slowing natural gas production

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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.Nat gas production vs Rig Counts

For reference, throughout 2013, dry natural gas production averaged ~66.5 billion cubic feet per day (or bcf/d). It averaged ~70.4 bcf/d in 2Q14. This exceeded the U.S. Energy Information Administration’s (or EIA) 69.6 bcf/d estimate for the period.

The EIA’s preliminary data shows that the rise-in-production trend continued in August. The increase in production is driven by higher production in the Marcellus and Utica shales.

A counterintuitive trend

Multiple factors have been creating this trend. First, while companies have 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.

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Another factor contributing to the increase is the development of super-prolific areas—like the Marcellus Shale. Wells in the best areas of these plays have extremely high natural gas production rates. They also have very low costs per unit of production. This makes drilling them profitable—even at low gas prices.

In such a scenario, if the number of gas-targeted rigs started to increase, natural gas prices could experience even more pressure. We have started to see the signs of this increase already—see Part 8 of Must-know: Why US rig counts are back on track with additions.

Key stocks and exchange-traded funds (or ETFs)

Natural gas prices affect drilling sentiment for major natural gas producers like Chesapeake Energy Corporation (CHK), Southwestern Energy (SWN), Devon Energy Corporation (DVN), and Comstock Resources (CRK).

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

In the next part of this series we’ll discuss how production in the Utica and Marcellus shales have affected the U.S. natural gas market.

 

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