Investors hoping that supply and demand in the natural gas market will balance out as drilling activity declines may want to consider the supply impact of the large number of uncompleted wells that the industry has in inventory.

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Uncompleted Wells
Many operators drill a well, but are unable to begin completion operations due to a lack of available hydraulic fracturing capacity or in some cases, a difficulty in obtaining financing. In February, 2011, Halliburton (NYSE:HAL) estimated that approximately 3,200 wells were waiting on completion at the end of 2010. Although not all of these uncompleted wells were in dry gas areas, many wells that are targeting oil and liquid plays produce substantial amounts of natural gas as well. Halliburton expects this number to increase during the first quarter of 2011, and is counting on this inventory to support demand for its services during the year.

Anadarko Petroleum (NYSE:APC) reported during its fourth quarter of 2010 conference call that the company has almost 200 uncompleted wells in the Marcellus Shale. These wells were either undergoing fracturing, waiting on capacity to free up or waiting to be connected to a pipeline. Quicksilver Resources (NYSE:KWK) reported that the company had 121 wells that were uncompleted at the end of 2010. The company would not estimate whether this inventory would be reduced during 2011.

Demand to the Rescue?
Although investors shouldn't expect any relief from the supply side any time soon, there may be some hope emerging on the demand side. In April, 2011, a bipartisan group of Congressmen introduced the New Alternative Transportation to Give Americans Solutions of 2011 act. The NAT GAS act includes tax credits and incentives to encourage the use of natural gas as a transportation fuel. These credits include ones targeted towards the purchase of a natural gas light vehicle or truck, the building of a natural gas refueling station or the manufacture of these types of vehicles.

Many companies have already started converting fleets of vehicles to run on compressed natural gas (CNG). In May, 2010, Chesapeake Energy (NYSE:CHK) announced a plan to convert its entire 4,200 vehicle fleet to use CNG by 2014. The company has already almost hit the 25% finished mark with this program.

Ryder System (NYSE:R) recently ordered 202 heavy duty trucks that run on natural gas. The company cited lower fuel costs and lower emissions for the decision. One company that may benefit from an increased demand for natural gas vehicles is Westport Innovations (Nasdaq:WPRT), which manufactures engine systems that run on liquefied natural gas (LNG). The company just received an order for 200 of these types of engines.

Buyer Beware
Investors might not want to get too excited about a significant boost in demand for natural gas as this same Congress just re introduced the Fracturing Responsibility and Awareness of Chemicals or FRAC Act. This bill would remove the exemption that hydraulic fracturing was given under a previous federal law, and possibly require an environmental review before a well is fractured.

The Bottom Line
Natural gas supply in the United States looks to keep increasing despite the lower rig count as thousands of uncompleted wells remain in inventory. Demand may come to the rescue, but don't hold your breath. (For more stock analysis, see Canadian Oil Companies Set To Outperform.)

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Tickers in this Article: APC, KWK, HAL, CHK, R, WPRT

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