A lot of natural gas industry observers, seeing the
combination of a dramatic drop in the rig count and resilient
monthly production data, have been left scratching their
heads. Isn't the rig count supposed to be a reliable
indicator of future production levels?
Not anymore, says consultancy BENTEK Energy. The firm
contends that rig efficiency, rather than the absolute number
of rigs in action, is the key driver of natural gas
production today. I wholeheartedly agree.
All year, we've watched E&Ps drop rigs, but maintain
or grow production. In August,
I arguedthat "being such efficient operators, exploration
and production companies like
Range Resources (NYSE: RRC) and
EOG Resources (NYSE: EOG) are actually
prolonging the downturn in natural gas." I think that was the
right call. The most recent government numbers (there's a
two-month delay in the reporting) show that daily gas
production in the Lower 48 increased from July to August, and
has fallen less than 1% from its February peak.
It's all about the productivity. BENTEK cites research by
Helmerich & Payne (NYSE: HP) that found
that Barnett shale wells drilled by the likes of
Devon Energy (NYSE: DVN) in 2008 were three
times more productive than the average U.S. land gas well in
2006. For Haynesville wells, which are coming on huge for
folks like
Petrohawk Energy (NYSE: HK), make that 10
times. The consultancy's BENTEK Productivity Index is
designed to show the "effective" rig count, incorporating a
host of technological advances in the oil patch, from pad
drilling to multi-stage fracture stimulation.
As of Oct. 16, the BPI stood at more than twice the actual
rig count. A multi-year plot of the two measures against one
another shows a steep drop into early 2009, followed by a
dramatic upturn in recent months. The takeaway is that the
natural gas industry, having high-graded its drilling
opportunity set through the downturn, is not that much less
productive today than when the rig count was dramatically
higher.
This is a great conceptual tool for oil and gas investors
to better understand present industry dynamics. It also
provides some counterweight to the argument put forth by
Chesapeake Energy (NYSE: CHK) that higher
prices are right around the corner. Fools, I suggest you keep
an eye on that BPI!
This article was originally published as
Forget About the Rig Counton
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