Gas Rig Count Continues to Fall; Equities Rebounding, Likely Represent Good Value

GREG COLMAN, Wellington West Capital Markets (04/20/2009)
N.A. Rig count pulls back 4% to 1,049; 760 rigs chasing U.S. Gas.

Largest pullback was 4% drop in gas rig count: top-down and bottom-up analysis suggests >850-1,100 gas rigs required to maintain production.

We have attacked the 'minimum rig count' question a second time and reach the same rig count answer; we believe that an average gas rig count of 850 in 2009 followed by a rebound to 1,100 in 2010 is required to meet demand. We have approached the minimum rig count question again from two angles; a bottom-up approach that applies a base decline rate to existing production, and thereafter adds production based on the average number of rigs turning per year. This method suggests that an average of 850 rigs turning will result in a 3.3Bcf/d drop in gas supply, or about 6.6%. This is versus an EIA estimated y/y gas demand drop of 1% in 2009.

From a top-down approach, we believe a gas rig count average of 850 in 2009, 1,100 in 2010 and 1,650 in 2011 will be sufficient to meet demand requirements. Our model takes into consideration the impact of higher productivity shale plays. We assume 72% of wells are conventional with average IP rates of 0.25 mmcf/d, 21% of wells are shale with a 1.25 mmcf/d IP rate, and 7% of wells are high productivity shales with 10 mmcf/d IP. As a result of this model, the gas rig count bottoms at 750 rigs operating in May and June, rebounding to 900 by year-end.

Like almost every cycle, ever, since the beginning of time, our analysis suggests this drilling downturn shall too pass - and history suggests that equities will lead the rig count by 2-6 months, implying the bottom may have already been put in.

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