Earnings season in the energy sector has provided fresh evidence that the number of horizontal wells being drilled but not completed is increasing quickly. This has the inadvertent effect of restricting the increase in natural gas supply. What happens when prices recover and these wells finally come online?
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The exploration and production industry is not engaging in any sort of conspiracy, as the managements of these companies are taking the actions that they feel necessary to benefit shareholders.
The reasons for the delay in completions in due mostly to economics and management's belief that natural gas prices will head higher once the recession ends. Since the horizontal shale wells have such high first year decline rates, it makes sense to delay the initial production until prices recover.
Biding Their Time
Newfield Exploration (NYSE:NFX) said during its most recent earnings report that it has 25 wells in the Woodford Shale that have been drilled but not completed. The company said that the timing of the completions would be based on future natural gas prices.
During its earnings conference call, Lee Boothby, the CEO of Newfield Exploration would not give an exact price needed to initiate completion activity on these wells. "Each one of our areas has different issues with regard to differentials and prevailing product prices," said Boothby.
Range Resources (NYSE:RRC) issued an operational update last week, and said that its capital plan in 2009 called for drilling 70 horizontal wells in the Marcellus Shale play in Pennsylvania. The company said that approximately 50 of these wells would be completed prior to year-end. It's not clear why the other 20 will not be completed. It may be an attempt to get better economics and rates of return on its wells, or perhaps due to other operational issues.
Capacity is certainly not an issue, as activity is down from record levels only a year ago. BJ Services (NYSE:BJS) reported in its recent quarterly results that the effective utilization of its U.S. pressure pumping stimulation business to be around 60%.
Halliburton (NYSE:HAL) made similar comments on its earnings conference call last week. Tim Probert, who heads the drilling and evaluation division said "a decline in the U.S. rig count by 55% from its peak have led to a significant oversupply of all types of equipment in the market." He said that Halliburton would try to reduce its pressure pumping fleet by 10-15% in 2009.
The Bottom Line
It's hard to get an accurate count of the number of wells drilled but not completed on an industry-wide basis, and therefore it makes it difficult to put a number on this looming supply. Just consider that Newfield Exploration and Range Resources, who are relatively small operators compared to the industry as a whole, have or will have 45 uncompleted wells between them.
A delay in completions by the exploration and production industry is the metaphorical equivalent of building a dam that holds natural gas instead of water. When natural gas prices recover, and this gas is released to the market, the extra supply may trip prices down again. (For additional reading, take a look at Accounting For Differences In Oil and Gas Accounting and Oil and Gas Industry Primer.)
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