TMFDeej (99.47)

North American Drillers are headed for a lot more pain

January 26, 2009 – Comments (3) | RELATED TICKERS: NBR , PTEN , UNT

I wrote a piece on how terrible natural gas prices are right now this weekend: Natural Gas Stinks.  The majority of the comments that I received on it talked about how now is the time to buy natural gas.  I completely agree that the time to buy things is when they are cheap, not when everyone wants them. 

One might want to consider scooping up shares of companies that have actual natural gas assets right now.  I have always preferred companies that have actual natural gas assets aka producers to drillers. If I was going to invest in natural gas when prices are cheap, I personally would be looking to pick up E&P companies.

I think that many drillers are in big trouble.  I'm not sure if the prices that natural gas drillers are currently trading is an adequate discount considering the possibility that it could be 2010 at least before we see any improvement in nat gas prices.

The demand for land-based rigs is driven by the spending of E&P companies. These companies typically set their budgets at the beginning of the calendar year. In reading recent press releases for E&P companies, it looks like they are cutting waaaay back on drilling in '09.

Back in October Barclays conducted a survey that found capital expenditures by E&P companies will fall by an estimated 12% in this year. The outlook is even worse in North America, where those surveyed said that they were cutting expenditures by 26%. Not only are these numbers bad, but the companies that were surveyed were asked to base their responses on $58 oil and $6.35 gas. We aren't even close to either of those prices right now.

I personally believe that A LOT more rigs will have to be idled before we see any significant move in gas prices. As of 1/9/09 the number of active rigs in North America was 1,949. The high water mark for active rigs in North America during the summer of 2008 was 2,031.

One may be able to estimate where the NA rig count is headed by looking at what happened during the last bear market for nat gas back in the late '90s. Back then, the active rig count in North America peaked at 1,032 in the middle of '97. It bottomed out at 488 active rigs in early '99. That is a painful 53% drop in active rigs. Compare that massive fall to the only 4% decline in rig count decline that we have currently seen in North America and it looks to me as though there is a lot of pain still to come for drillers, even if the market is forward looking.

If we do see a dramatic slowdown in North American drilling activity, what companies will suffer?  Here's a list of the largest North American land drillers and the number of rigs that they own.  I personally am staying far away from all of these companies right now.  At some point they may be excellent buys but I suspect that a number of them have further to fall.

- Nabors Industries (NBR): 421 rigs

- Precision Drilling (PDS): 368 rigs (post GW acquisition)

- Patterson-UTI Energy (PTEN): 350 rigs

- Helmerich & Payne. (HP): 212 rigs

- Unit Corp (UNT): 131

Deej