Natural gas producers are unlikely to begin dusting off their rigs despite an uptick in natural gas prices since April, according to a recent report by Houston-based Wunderlich Securities.
The upper limit of current expected prices, about $4 per million Btu (MMbtu), would likely keep rigs mothballed since it does not meet a threshold most companies are comfortable with, according to Irene O. Haas, lead analyst of the Wunderlich report.
“The industry is not eager to increase gas drilling unless gas prices reach $4.50-$5.50/MMbtu on a sustainable basis,” she said.
Even at that level, some companies would be wary of increased drilling because such a price could be a spike that could fall back to the current range. In general producers are not bullish, even after prices rose during a seven-month period to roughly $3.50/MMbtu this month from $2/MMbtu in April, Haas said.
Wunderlich informally polled “a handful” of companies to gauge whether the recent price recovery would hold up and at what price point rigs would be redeployed.
Whether a further rebound is in the offing is questionable, the report states. Most producers are cautious, since “strong associated gas production and gas behind pipes will likely offset dry gas production decline,” Haas said.
The current price strength stands out as demand is typically soft in the shoulder months of May to June and September to early November.
And the price is a far cry from the $13 that natural gas commanded in mid-2008, before its plummet.
Still, the summer was good as the balance between supply and demand shifted.
In the spring, the heating season built natural gas stockpiles because of the unusually warm winter and unexpectedly strong natural gas production despite dwindling numbers of available dry gas rigs. Overall, the number of rigs has dropped about 75 %, to about 400 from 1,600 in 2009.
Storage volume was 2.5 trillion cubic feet (Tcf), roughly 1 Tcf over the five-year average.
In the summer, production also began to flatten out with supply growth of 2.9 %, about the same increase in demand — 2.7 % — from January to August this year.
Compared with 2011, increased demand in the first eight months of 2012 resulted in a 22.3 % increase in the power generation sector; residential, commercial and industrial demand fell.
Some additional highlights of the report are:
• EOG Resources Inc. (NYSE: EOG) of Houston wants to see a structural change in gas demand. During a recent conference, EOG officials said a temporary spike above $5/MMbtu could stimulate drilling though prices would fall back to $3.50-$4.00/MMbtu levels. EOG wants a significant permanent reduction in coal-fired power plants to “open the vault” on its gassy properties.
• If prices stay in the $3-$4/MMbtu range, the first place to see drilling incremental activity will be the Marcellus shale of West Virginia, Pennsylvania and New York.
• At current prices, PDC Energy (Nasdaq:PDCE) of Denver can generate 25 % return from its dry gas wells in Harrison County, W. Va.
• Noble Energy of Houston (NYSE:NBL) is still drilling and making money in the dry Marcellus, as most leases controlled by Consol Energy Inc. (NYSE:CNX) of Canonsburg, Pa., carry low royalties, and NBL was able to leverage on Consol’s extensive infrastructure. Wunderlich rates Marcellus leveraged names as a “Buy.”
• PDC Energy and Magnum Hunter Resources Corp., Houston (NYSE: MHR) will benefit from this modest gas price recovery. PDCE’s 2011 reserve mix was 66 % natural gas and 12 % Appalachia. The PDC Mountaineer joint venture could become more active if prices stay firm, Haas said. PDC Mountaineer is a joint venture formed in 2009 between PDC and Lime Rock Partners that is focused on exploration and development of natural gas in the Marcellus.
• Despite the reluctance of producers, natural gas drilling activity in the Gulf of Mexico has generally increased during the past year despite a price drop, according to the U.S. Energy Information Administration. In September, the average number of rigs actively drilling was more than double the weekly count a year ago.
