Drilling efficiency keeps pushing natural gas production higher

In the previous article, we learned about two important factors that affect US natural production and production per rig. In this article, we’ll discuss a third factor—drilling efficiency. Drilling efficiency plays a major role in determining natural gas production growth.

Natural gas production per rig has increased most in the Marcellus, Utica, and Haynesville Shales over the past eight years. If the number of gas-targeted rigs actually started to rise, natural gas prices could come under even more pressure.

According to research firm Sterne Agee, continued supply growth amid weak demand will take the Henry Hub benchmark natural gas price to $2.70 per Mcf (thousand cubic feet) in 2015 and $3.20 per Mcf in 2016. The US Energy Information Administration (or EIA) is slightly more bullish, projecting $2.97 per Mcf and $3.38 per Mcf for 2015 and 2016, respectively.

Natural gas prices affect the drilling sentiment of major natural gas producers, including Chesapeake Energy (CHK), Cabot Oil & Gas (COG), Devon Energy (DVN), and Southwestern Energy (SWN).

Many of these producers are also part of energy exchange-traded funds such as the Energy Select SPDR ETF (XLE). Chesapeake Energy, Southwestern Energy, and Devon Energy together account for 3.2% of XLE.