The number of oil and gas wells either waiting for completion or for access to pipeline in the onshore United States continues to increase, as operators allocate billions in additional capital for domestic development programs.

TUTORIAL: Economic Indicators To Know

Halliburton (NYSE:HAL) reported in its second quarter of 2011 conference call that more than 3,500 wells were uncompleted in the United States at the end of the quarter. The company indicated that the total would continue to increase for the balance of 2011, as the oil service industry struggles to keep up with the level of drilling.

Comstock Resources (NYSE:CRK) has been struggling to reduce its inventory of uncompleted wells since the end of 2010, when the company was unable to secure enough hydraulic fracturing capacity to keep up with drilling activity. The company has reduced this inventory from 35 wells at the end of 2010 to 16 at the end of Q2 2011.

Quicksilver Resources (NYSE:KWK) is active mostly in the Barnett Shale and reported 85 gross uncompleted wells as of June 30. The company estimates that planned activity in the final six months of 2011 would reduce this inventory to 45 gross wells by the end of the year. This large inventory of uncompleted wells has allowed Quicksilver Resources to grow production by 20% in 2011 while operating only two rigs in the Barnett Shale.

Continental Resources (NYSE:CLR) reported 46 gross or 25 net wells that were either undergoing completion operations or waiting to be completed at the end of Q2 2011. This inventory level is approximately 50% above normal levels for the company and reflects delays caused by abnormally harsh weather in North Dakota, where the company's operations are concentrated.

Ultra Petroleum (NYSE:UPL) reported 53 net wells that were either waiting on completion or pipeline in the Marcellus Shale at the end of the most recent quarter. The company blamed an aggressive development program for the large number of wells.

One company that is not having any issues with uncompleted wells is EnCana (NYSE:ECA), which reported its level of uncompleted wells in the Haynesville Shale at normal levels in Q2 2011.

The Bottom Line
The continued increase in the number of uncompleted wells has several implications for the onshore drilling cycle. Since most of these wells produce primarily natural gas, it amounts to a shadow inventory of future production that will come on line over the next few years and keep production flat or rising - even if the natural gas rig count continues to fall.

This is positive news for oil service companies, which will be kept busy whittling this inventory down. But it's negative news for natural gas fundamentals, as the production decline that is needed to balance the market may be put off for a long time. One negative for the exploration and production companies is that the inventory represents a temporary waste of capital, as funds have been spent on drilling wells that are producing no revenue. (We look at three widely used valuation methods and figure out how companies justify spending. See An Introduction To Corporate Valuation Methods.)

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