Wednesday, April 10, 2013

Backlog of Haynesville Non-Completed Wells Steadily Decreasing

It seems pretty clear that rig counts in the Haynesville Shale and most other dry gas plays are not going to increase significantly any time soon, even in reaction to recently increasing natural gas prices.  A combination of producer self-discipline and the fear of investor retribution should keep the lid on dry gas plays for the near term.

Looking at Haynesville rig counts and completions over the past eight months, it appears that both have leveled out (bottomed out?), as shown on the chart below.  Louisiana Haynesville completions in the second half of 2012 declined to fewer than 20 per month, down from a high of 90 in May 2011.  Louisiana Haynesville rigs have averaged around 13 since June 2012.  But look at that green line, which represents the Henry Hub spot price of gas.  It's fluttering up to the $4/MMBtu range.  Hmmm, looks tempting...

While we shouldn't look for big increases in drilling or completions in the near term, something else interesting has been happening below the surface.  The big lag in the above chart between rig count and monthly completions created a significant inventory of drilled but not completed wells over the past several years.  Over the past year, however, that backlog has been steadily declining.  By the Louisiana DNR's count, the number of Haynesville wells drilled but not completed as of February 2013 was 165, down 108 from 273 in April 2012.  I believe this number to be bloated with wells that are permanently shut-in or out of commission for a variety of reasons.  I think the "active" backlog is closer to 100, and even some of those are long in the tooth and might not become active wells.  (Note:  I've used the DNR's numbers on the chart below to be able to look back on a consistent basis).

The companies with the largest share of the "active" non-completed wells as of March 21 are EXCO, Chesapeake and Petrohawk, which combine to account for around 80-85% of the number.  Both EXCO and Petrohawk remain relatively active in the play, so a backlog is not unexpected, while Chesapeake is doing the bare minimum to hold its leases.  Of the remaining non-completed wells in backlog, a little more than a third are #1 wells (about half of those are Chesapeake's), while the remainder are alternate wells (about half are EXCO's).

I don't really know what the impact of the declining backlog of non-completed wells will be.  I don't necessarily foresee any significant pickup in activity in the Haynesville Shale any time soon, but with the backlog of non-completed wells narrowing, companies seeking to produce additional gas from new wells in the Haynesville will have to start drilling for it rather than dipping into the backlog.  A more pessimistic view might be that the number of new completions will decline to stay roughly in line with the rig count.  We'll see...

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