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* Natgas rig count up 8 to 542 this week

* Oil rig count falls 2 to 1,419

The number of rigs drilling for natural gas in the United States rose on Friday for the first time in seven weeks, bouncing off a 13-year low, oil services firm Baker Hughes said in its weekly report on Friday.

The rig count rose 8 to 542 in the week to July 6, as natural prices rose to six-month highs, though it is still way below the peak reached in October last year of 936.

Natural gas producers have slowed natural gas drilling due to decade-low prices earlier this year and instead concentrated on oil and liquids-based plays.

The U.S. oil rig count fell 2 this week to 1,419, but is still up 412 compared to a year ago.

Natural gas production remains near record highs despite a falling rig count, suggesting that associated gas from oil wells can keep production high despite less pure gas drilling activity.

Monthly data from the U.S. Energy Information Administration (EIA) showed natural gas output in the Lower 48 states rose for the first time in three months in April to 72.48 billion cubic feet per day in April, up 0.56 bcf per day from March.

Horizontal rigs, the type that are used to coax oil and gas from unconventional shale reserves, rose for the third straight week, up 3 to 1,174, according to Baker Hughes. This is still lower than the all-time high of 1,193 recorded in the week to May 18.

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The number of rigs working in federal waters off the Louisiana coast hit 46 last week, the highest number in three years.

Twenty-eight rigs were working in fewer than 500 feet of water in Louisiana Outer Continental Shelf as of June 8 and 18 were working in deep water or more than 500 feet of water.

The last time the rig count reached 46 was in May 2009.

State leaders are pointing to the progress as a sign of recovery after the April 2010 Deepwater Horizon rig explosion, which killed 11 men, set off the largest oil spill in the Gulf of Mexico and prompted a six-month ban on deepwater drilling.

Analysts note, however, that the Gulf has yet to recover the number of active deepwater rigs two years after the oil spill.

There was an average of 23 rigs working in deep water in May 2009.

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The number of rigs actively exploring for oil and natural gas in the U.S. is down three this week to 1,980.Houston-based oilfield services company Baker Hughes Inc. reported Friday that 1,386 rigs were exploring for oil and 588 were looking for gas. Six were listed as miscellaneous. A year ago this week, Baker Hughes reported 1,854 rigs.

Of the major oil- and gas-producing states, Texas gained six rigs while California, New Mexico and North Dakota each were up one.

Oklahoma declined by seven rigs; Louisiana and Pennsylvania by two each; Alaska and West Virginia by one apiece. Arkansas, Colorado and Wyoming were unchanged.

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The number of rigs operating in federal waters off the Louisiana coast has surpassed the count that existed before regulators placed a ban deep-water drilling in the Gulf of Mexico nearly two years ago.

The number of working rigs on the federal Outer Continental Shelf off the state coastline hit 41 last week, according to figures the state Department of Natural Resources released Friday.

This is the first time the weekly count has moved above 40 since regulators imposed the drilling moratorium in May 2010 in response to the BP oil spill disaster. The ban was lifted in October 2010.

The rig count in federal waters off Louisiana has been in a steady decline since 2000 when the area supported around 120 active rigs, according to Baker Hughes.

Federal waters off the coast had an average rig count of 42 in the weeks leading up to the federal moratorium in 2010. The number of active rigs fell to a low of 11 in the months following the ban.

By this time last year, 23 active rigs had returned to the area.

The current count is up from 40 active rigs the week of April 16.

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There are two reasons your heating bills likely were significantly lower this past winter than in other years: the unseasonably warm weather and rock-bottom natural-gas prices.

The nice weather doesn’t seem to be going anywhere, and neither do cheap gas prices.

The latter is having an impact on the oil-and-gas industry, which for the past decade has explored and extracted from gas-rich shale regions in Texas and Pennsylvania, to name two.

Just three years ago, natural gas was $10 per 1,000 cubic feet, which allowed drillers a comfortable profit on their investment, which in unconventional shale plays can reach $10 million per horizontal well.

But today, natural-gas prices are below $2 per 1,000 cubic feet for the first time in a decade.

Gone is the prospect of gas-only exploration. The operating gas-rig count nationwide was 624 last week, the lowest weekly figure in a decade, according to Houston oil-and-gas-services company Baker Hughes.

Gone, too, is the gaping profit margin. Energy analysts estimate that $5 per 1,000 cubic feet is the profitability point for most drillers; any price less than that, coupled with a deficient way of transporting or storing, makes for an unfavorable business model. “There are no hard-and-fast rules on that,” said Dan Whitten, spokesman for Americas Natural Gas Alliance. “What you’re seeing is some companies are making those decisions, and I think some of that is (in) areas where there are only dry-gas potential.

”Low natural-gas prices have changed the strategy for drillers in various ways.

First, companies such as Oklahoma City-based Chesapeake Energy Corp., a large mineral-rights holder in Ohio, have decided to back out of natural-gas plays such as the Barnett shale in Texas and the Marcellus shale in Pennsylvania.

The company’s rig count in the Barnett, which was 43 in 2008, is just six this year.

Meanwhile, the company hopes to have 40 rigs in the Utica shale by 2015.But drillers also must consider what they want to do with gas from current wells.

Storage is the most obvious option, but because of the mild weather, there’s a surplus of natural gas, and underground storage space is now at a premium.

Drillers can “dial back” natural-gas production at well heads, but not nearly to the extent that it could ease the gas surplus. That brings in another option: flaring, the process in which gas is burned off. The process has been used for years, but never to the extent it is used today. In North Dakota’s oil-rich Bakken shale, it is estimated that as much as one-third of produced natural gas is flared.

“The purpose of flaring is to safely consume any produced gas before it has reached sufficient conditions to enter a sales pipeline,” said Pete Kenworthy, Chesapeake spokesman.

Environmentalists have criticized natural-gas flaring as an even worse hazard than the extraction process, which is done by “fracking,” or blasting water, chemicals and sand thousands of feet below the ground to fracture shale rock formations.“[Flaring] contributes to organic compounds in the air that will affect everyone’s health and greenhouse gases,” said Vanessa Pesec, president of the Network for Oil and Gas Accountability.

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In its weekly release, Houston-based oilfield services company Baker Hughes Inc. (BHI) reported a rise in the U.S. rig count (number of rigs searching for oil and gas in the country). This can be attributed to an increase in the tally of both oil and natural gas-directed rigs. In particular, the natural gas rig count climbed for only the third time in 2012, while the oil rig count scaled another record high.

The Baker Hughes rig count, issued since 1944, acts as an important yardstick for drilling contractors such as Transocean Inc. (RIG), Diamond Offshore (DO), Noble Corp. (NE), Nabors Industries (NBR), Patterson-UTI Energy (PTEN), Helmerich & Payne (HP), etc. in gauging the overall business environment of the oil and gas industry.

Analysis of the Data

Weekly Summary: Rigs engaged in exploration and production in the U.S. totaled 1,972 for the week ended April 20, 2012. This was up by 22 from the previous week’s count and represents the fifth increase in the last 10 weeks.

The current nationwide rig count is more than double that of the 6-year low of 876 (in the week ended June 12, 2009) and significantly exceeds the prior-year level of 1,800. It rose to a 22-year high in 2008, peaking at 2,031 in the weeks ending August 29 and September 12.

Rigs engaged in land operations climbed by 19 to 1,904, inland waters activity increased by 1 to 23, while offshore drilling was up by 2 to 45 rigs.

Natural Gas Rig Count: The natural gas rig count – which recently slumped to a 10-year low – increased for just the second time in 15 weeks to 631 (a gain of 7 rigs from the previous week). Despite the weekly improvement, the number of gas-directed rigs is down approximately 33% from its 2011 peak of 936, reached during mid-October.

In fact, the current natural gas rig count remains 61% below its all-time high of 1,606 reached in late summer 2008. In the year-ago period, there were 878 active natural gas rigs.

Oil Rig Count: The oil rig count was up by 15 to 1,337. The current tally – the highest since Baker Hughes started breaking up oil and natural gas rig counts in 1987 – is way above the previous year’s rig count of 913. It has recovered strongly from a low of 179 in June 2009, rising almost 7.5 times.

Miscellaneous Rig Count: The miscellaneous rig count (primarily drilling for geothermal energy) at 4 remained unchanged from the previous week.

Rig Count by Type: The number of vertical drilling rigs rose by 3 to 571, while the horizontal/directional rig count (encompassing new drilling technology that has the ability to drill and extract gas from dense rock formations, also known as shale formations) was up by 19 at 1,401. In particular, horizontal rig units – that reached an all-time high of 1,185 in January this year – increased by 10 from last week’s level to 1,155.

To Conclude

Notwithstanding the modest gain registered by the natural gas drilling activity over the last week, it is still down by 303 rigs (or 32%) from the recent highs of 934 in October 28.

Is this bullish for natural gas fundamentals? The answer is “no,” if we look at the U.S. production and the shift in rig composition.

With horizontal rig count – the technology responsible for the abundant gas drilling in domestic shale basins – currently close to its all-time high, output from these fields remains robust. As a result, gas inventories still remain at elevated levels – up some 60% above the benchmark five-year average levels.

Hamstrung by this huge surplus, natural gas prices have dropped approximately 60% from 2011 peak of $4.92 per million Btu (MMBtu) in June to the current level of around $2.00 (referring to spot prices at the Henry Hub, the benchmark supply point in Louisiana). Incidentally, prices hit a 31-month low of $1.85 during last week.

To make matters worse, a near-record mild weather across most of the country curbed natural gas demand for heating all winter, leading to an early beginning for the stock-building season. The grossly oversupplied market continues to pressure commodity prices in the backdrop of sustained strong production

This has forced several natural gas players to announce drilling/volume curtailments. Exploration and production outfits like Ultra Petroleum Corp. (UPL), Talisman Energy Inc. (TLM) and Encana Corp. (ECA) have all reduced their 2012 capital budget to minimize investments in development drilling.

On the other hand, Oklahoma-based Chesapeake Energy Corp. (CHK) – the second-largest U.S. producer of natural gas behind Exxon Mobil Corp. (XOM) – and rival explorer ConocoPhillips (COP)  have opted for production shut-ins to cope with the weak environment for natural gas that is likely to prevail during the year.

However, we feel these planned reductions will not be enough to balance out the massive natural gas supply/demand disparity, and therefore we do not expect much upside in gas prices in the near term. In other words, there appears no reason to believe that the supply overhang will subside and natural gas will be out of the dumpster in 2012.

With natural gas unlikely to witness a durable rebound in prices from their multi-year plight and at the same time crude prices topping $100 a barrel, energy producers are boosting liquids exploration to take advantage of this trend. As a result of movement of rigs away from natural gas towards oil, the tally of liquids-directed rigs has climbed to another 25-year high.

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Comstock Resources (NYSE:CRK) plans to suspend all operated drilling in the Haynesville Shale by March 2012, as falling natural gas prices continue to trigger major reductions in dry gas drilling in the onshore United States. The company will also cut back total overall spending on drilling in 2012.

Haynesville Shale
The company has 79,000 net acres prospective for the Haynesville and an additional 51,000 net acres of exposure to the Bossier Shale, another dry gas play on its property. The acreage is spread across many different counties in northern Louisiana and eastern Texas.

It has been scaling back development of the Haynesville for several years. The company operated seven rigs in this play in 2010, and then began shifting capital to crude oil and other liquid plays. During 2011, it moved two rigs to the Eagle Ford Shale and released three other rigs working in the Haynesville, ending the year with only two rigs in this play.

The company plans to move the final two rigs working the Haynesville to the company’s recently acquired properties in the Permian Basin.

Despite the reduction in Haynesville Shale drilling, it will still expend significant capital here in the early part of 2012. The company will spend approximately $45 million to drill 5.1 net wells and another $61 million to complete 13.3 net wells. Most of this activity will be on a non-operated basis.

2012 Capital Spending
Comstock Resources revised the 2012 capital budget which calls for spending $458 million to drill 60.6 net wells and complete 19.1 net wells drilled in 2011. The company’s previous plan called for spending approximately $545.0 million in 2012 for drilling and completion activities.

One company increasing capital expenditures in 2012 is Oasis Petroleum (NYSE:OAS), which is active in the Williston Basin. The company expects to spend approximately $884 million this year, compared to between $660 million and $667 million in 2011.

Property Impairment
Comstock Resources will also record an impairment of some of its natural gas properties due to the decline in natural gas prices. The company plans an impairment charge of approximately $61 million or 86 cents per share after tax.

Other Haynesville Shale Operators
Other operators that may announce cuts in dry gas drilling include EXCO Resources (NYSE:XCO). The company announced in November 2011 that it would operate 13 rigs in this play. QEP Resources (NYSE:QEP) is also active in the Haynesville, and previously announced a reduction in drilling here in November 2011.

The Bottom Line
The industry flight from dry gas drilling in the onshore U.S. is gaining traction with Comstock Resources, the latest company to cut drilling in these areas. There is every indication that these cuts will eventually have a meaningful impact on natural gas supply in North America.

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The number of active U.S. drilling rigs has topped the 2,000 mark.

The count climbed by 22 this week, to 2,012, The Associated Press reported today.

Houston-based oilfield services firm Baker Hughes Inc. said 1,070 rigs were exploring for oil and 935 for natural gas, with seven listed as miscellaneous. The rig count is up by 399, or 24 percent, from a year ago, when it stood at 1,671.

The count peaked at 4,530 nearly 30 years ago, in the final week of 1981, a year of exceptionally high oil prices. A low of 488 was recorded in 1999, a year of low oil and natural gas prices.

–Jack Z. Smith

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