Range Resources (RRC) held its quarterly conference call earlier today. Before going into this, we have in the past highlighted the obsession on supply side of NatGas while ignoring the demand side. According to CIBC, days of supply have been falling, not rising, despite the oversupply concern as this captures the uplift in demand. This is a result of higher demand from electricity power generation (tied to coal switching) somewhat offset by lower residential demand (tied to solar and efficiency gains in our view).
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What’s most interesting in RRC’s EPS presentation is that, according to management, the NatGas market is about 2-4BCF/D oversupplied and that they believe demand in 2015 will rise 2BCF/D greatly reducing the oversupply. One has to be a bit skeptical of the source as RRC is expected to grow production 20% this year so it stands to reason that they better expect demand to increase or else they will shoot themselves in the foot as prices stagnate (it’s clear to some extent they already have). Related: Can Shell Afford To Drill In The Arctic?
RRC is mostly a Marcellus play where the majority of the oversupply is coming from. Nonetheless it does stand to reason that falling rig counts, especially in the regions causing the oversupply, and oil rig reductions elsewhere will eventually affect production. Management believes 16BCF/D of NatGas is tied to oil drilling and half of that tied to shale oil (see below).
In the presentation below, they reiterate the high decline rates on shale oil production of 80% (which seems very consistent with CLRs & WLL stats) in the first 12 months. Thus, if rigs fall, even with some uplift in well productivity of 20-30%, production should fall. They argued on the call that unlike in 2008/09 laterals are much longer indicating limited productivity gains vs. that time, hence why the theory that rig drops don’t lead to production cuts is false this time. In addition, we are much further along on horizontal wells vs. vertical wells too. This concurs with our research and thus why 2H both oil and gas production will plateau and, in the case of oil, fall. Related: HSBC Advises Clients To Get Out Of Fossil Fuels
On a side note, once again the media and investor lies are getting exposed as, according to the EIA, Cushing inventory fell 514,000 barrels despite the constant talk of it overflowing by May. Overall inventory still rose by a less than expected amount of 1.9MB. If this doesn’t prove we are in the age of propaganda what does? Any comments, Goldman Sachs, or should we give your analyst a raise now? Regardless the fall in inventory is welcome and further demonstrates the combined effects of seasonality at refineries waning, higher demand and the first signs of production moderation taking hold.
By Leonard Brecken of Oilprice.com
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