According to a new report from Baker Hughes Co., the US natural gas sector is rapidly pulling drilling rigs from the field due to oversupply conditions that have led to a collapse in natural gas prices over a nine-month period.
Baker Hughes reported Friday that exploration companies reduced rigs by 16 to 141 this week. This is the most significant weekly decline since February 2016.
Nabors Industries Ltd., one of the top providers of rigs to shale drillers, warned last month about the fall in rig orders. The rig provider expects a 9% slide in its US rig leases by the end of June. Its bearish forecast comes as prices once commanded more than $10 per million British thermal units in late August 2022 and have since plunged to $2.25.
Bloomberg explained a combination of factors led to the NatGas glut:
"The glut developed after a key US gas-export facility was shut by a fire and abnormally mild winter weather gutted heating demand."
The good news is that low prices have pushed drillers to curtail production growth. Comstock Resources Inc. and Southwestern Energy Co. have already said drilling in Louisiana's Haynesville Shale region would be reduced.
"What's going to suffer the most is the number of drilling rigs," said Angie Gildea, who heads KPMG LLP's US energy, natural resources, and chemicals team. She noted companies "will take lower production growth over having to reduce dividends to shareholders."
Meanwhile, Citigroup Inc. analysts warn some exploration companies are shutting down existing wells due to the supply glut and low prices.
"We expect further reductions across both natural gas rigs and frac fleets in the Haynesville, while throttling and shut-ins are likely to be needed across all basins by the summer," Citigroup's Paul Diamond wrote in a note to clients.
Low natural gas prices plus tighter credit conditions will make it even more challenging for drillers to tap credit lines from big banks. This is the necessary step to correct oversupply conditions.
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