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Published by: Rob Port on Jul 12, 2012
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U.S. Research
Published by Raymond James & Associates
Please read domestic and foreign disclosure/risk information beginning on page 10 and Analyst Certification on page 10
© 2012 Raymond James & Associates, Inc., member New York Stock Exchange/SIPC. All rights reserved.
International Headquarters:
The Raymond James Financial Center |880 Carillon Parkway|St. Petersburg, Florida 33716|800-248-8863
June 25, 2012
Industry Brief 
J. Marshall Adkins,
(713) 789-3551, Marshall.Adkins@RaymondJames.com
Collin Gerry,
(713) 278-5275, Collin.Gerry@RaymondJames.com
James M. Rollyson,
(713) 278-5254, Jim.Rollyson@RaymondJames.com
Aryan Barto,
Res. Assoc., (713) 278-5243, Aryan.Barto@RaymondJames.com
Energy: Stat of the Week _______________________________________________________________________________________
Rigging Down; Lowering 2012 & 2013 U.S. Rig Count Forecasts
In today’s Stat,
we take a deeper look into our new rig count assumptions that drive our proprietary bottom-up production-by-play model.
Recall, on April 16, we lowered our 2013 U.S. rig count forecast to a 3% average annual DECLINE (or a 10% beginning-to-end-of-year decline in 2013). Following the further reduction in our oil price outlook last week,
we now expect average annualonshore rig growth of only 4% in 2012 and a 13% DECLINE in 2013. In fact,
we think the looming oil supply problem potentiallycould be so severe that WTI oil prices must fall far enough to drive the total U.S. onshore rig count down roughly 25% from nowuntil exit 2013.
Keep in mind that consensus expectations for 2013 still assume increasing drilling activity y/y. To put this intoperspective, last week the total rig count reached 1,966 rigs, and we anticipate by the end of 2013 there will be roughly 1,470 activerigs.
     D    e    c  -     1     1     J    a    n  -     1     2     F    e     b  -     1     2     M    a    r  -     1     2     A    p    r  -     1     2     M    a    y  -     1     2     J    u    n  -     1     2     J    u     l  -     1     2     A    u    g  -     1     2     S    e    p  -     1     2     O    c    t  -     1     2     N    o    v  -     1     2     D    e    c  -     1     2     J    a    n  -     1     3     F    e     b  -     1     3     M    a    r  -     1     3     A    p    r  -     1     3     M    a    y  -     1     3     J    u    n  -     1     3     J    u     l  -     1     3     A    u    g  -     1     3     S    e    p  -     1     3     O    c    t  -     1     3     N    o    v  -     1     3     D    e    c  -     1     3
Old vs New Rig Count Forecast
Jan 30 Forecast/CurrentConsensusApril 16 ForecastNew Forecast
Jan 30 Forecast/Current ConsensusApril 16 ForecastNewForecast
Source:Baker Hughes; Raymond James Research
Oil Activity Starts to Slow Now; Tumbles Later
We believe the oil rig count needs to drop ~300 rigs from today through exit 2013. Where are the rigs going to drop? On absolutenumbers, the largest number of rigs will likely come out of the “Big 3” plays (Eagle Ford, Permian, Bakken). However, the moremarginal oil plays, particularly the Midcontinent (sans the Mississippi Lime), should represent the largest percentage declines as theytend to be most cost intensive. Looking outside the 14 major basins, we suspect there should be significant decreases as thesesmaller, more mature reservoirs tend to have the highest breakeven points on average. While we anticipate the rig count beginningto turn over in the summer (read July 2012) as spot rigs start to rig down and as contracts are not renewed, we expect the pace tomeaningfully accelerate starting in 2Q13.
Overall, we expect the U.S. onshore oil rig count to fall from its current level of 1,421 rigsto roughly 1,100 rigs by the end of 2013.
The charts below depict our oil rig count assumptions by basin (right) and total (left).
Raymond James
U.S. Research
© 2012 Raymond James & Associates, Inc., member New York Stock Exchange/SIPC. All rights reserved.
International Headquarters:
The Raymond James Financial Center |880 Carillon Parkway|St. Petersburg, Florida 33716|800-248-8863
-100-80-60-40-20020406080100120Eagle FordBakkenPermianGraniteWashMississippiLimeOther
Oil Rig Growth
Source: BakerHughes; RJ Est.
Oil Rig Count
Source: BakerHughes; RJ Est.
Dry Gas Rig Count Continues to Bleed & Wet Gas Follows Oil Downward
Despite the large shift out of gassy plays, there are still ~560 gas directed drilling rigs. Of these we estimate roughly one-third aredrilling for “dry” gas. This component of the rig count has fallen at a dramatic pace with a >40% decrease year to date. Given theover-supplied gas market, we expect these rigs to continue to drift lower, albeit at a slower pace than we have seen thus far.
Byyear-end 2013 we still think the dry gas rig count will fall from its current level of 182 rigs to ~100 rigs.
The more important andglaring change is our expectation for decreases in the wet gas rig count. While wet gas has held up better as a result of higher oilprices, it too has taken a licking, but we don’t think it will keep on ticking. With crude oil coming down, NGL pricing should follow suitand should fall meaningfully faster as many wet gas plays are more marginally economic when compared to oil. Specifically
weexpect the wet gas count to fall from 359 rigs active today to roughly 270 rigs by year-end 2013.
As illustrated below, the lion’sshare of these rigs are dispersed in some of today’s largest plays (Eagle Ford, Marcellus, Utica, Granite Wash, etc.). Overall, weexpect the U.S. gas rig count to fall about 190 rigs (or 33%) from current levels.
Other22%Eagle Ford21%Permian8%Marcellus15%Barnett9%CanaWoodford11%Granite Wash14%
Wet Gas Breakdown
June 2012
Source: BakerHughes; RJ Est.
Gas Rig Counts
Wet GasDry Gas
Source: BakerHughes; RJ Est.
What Does Sub-$80 WTI Do For E&P Cash Flows?
As you may suspect, our forecasted E&P cash flows will likely be coming down as we see production growth more than offset bysignificantly lower crude oil and NGL prices. After inserting our new price deck and adjusting for our current production forecastsgiven the lower rig count, E&P cash flows are expected to decline significantly both this year and in 2013. This is not surprising,however we think the proper way to view this is to look at the expectations for 2014 and 2015. With our long-term oil forecast at areasonable $80 WTI, we suspect that the increase in production combined with the rebound in oil prices and a recovery in gas pricesshould leave energy companies well positioned for a 2014 and 2015 recovery. Under our forecasts, 2014 cash flows should reboundto near 2011 levels, while 2015 cash flows should be ~7% higher year over year. As such, our expectations for drilling activity followas we suspect that the rig count should meaningfully rebound in the second half of 2014 and through 2015.
Raymond James
U.S. Research
© 2012 Raymond James & Associates, Inc., member New York Stock Exchange/SIPC. All rights reserved.
International Headquarters:
The Raymond James Financial Center |880 Carillon Parkway|St. Petersburg, Florida 33716|800-248-8863
E&P Cash Flows Available for Drilling
Sources: U.S.Energy Information Administration, Spears and Associates, Inc., RJ Est.
We should note that we fully recognize that looking only at E&P cash flow available for drilling to forecast drilling activity is overly simplistic. Most industry veterans would be quick to tell you that E&P companies habitually outspend cash flow.
Our increased negativity is predicated on the belief that significantly rising U.S. oil production in the face of weaker global oildemand growth is on track to drive oil prices lower in 2013. As a result, we believe that U.S. drilling activity must eventually comedown in order to rein in supply growth to help balance the market. We now believe that the 2012 rig count will average 1,944 rigs.This is down 4% from our old forecast. Perhaps more importantly, we are now expecting the 2013 rig count will average 1,693 rigs,this is down 13% from our expected 2012 average rig count assumption and down 13% from our prior forecast.

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