Arkansas rig count falls to one, gas prices expected to remain low through 2017

A week after Southwestern Energy Inc. announced plans to shut down in drilling operations in the Fayetteville Shale, Arkansas now has only one rig in operation as natural gas production in the once prosperous Fayetteville Shale Play in Arkansas has essentially come to a halt.

On Wednesday, Baker Hughes released its weekly rig count two days early because Christmas Day falls on Friday. Today’s report show Arkansas now has only a single rig in operation for the first time since early October of 2003 – several years before Southwestern and Oklahoma City-based Chesapeake ignited the shale boom in the unconventional natural gas development that brought billions of investments into northeastern and parts of north central Arkansas.

A week ago, there were three rigs in operation across the state of Arkansas. However, Southwestern announced late Friday it had shut down two drilling rigs because of depressed natural gas prices that are well below the $2 level.

Despite the rough sledding for Southwestern, Wall Street analyst Fadel Gheit said the Houston-based driller’s decision to mothball its drilling operation in Arkansas until natural gas prices rebound is a good decision.

“Southwestern is a well-managed company with one of the worst stock performance this year on low natural gas prices,” said Gheit, managing director at New York City-based Oppenheimer & Co. “Its decision to shut in Fayetteville was the right thing to do and I wish other gas producers would do the same, although most are forced to continue to lose money, as they need the cash flow to stay in business.”

Gheit said the prospect for natural gas prices in the near-term are not good, which likely means the Fayetteville Shale Play may be defunct for quite a while.

“Unfortunately natural gas prices are expected to remain low in 2016 and 2017,” Gheit said.

In Tuesday’s session on the New York Mercantile Exchange, natural gas futures for January delivery closed at $1.88 per million British thermal units (MMBtu), down 2.6 cents or 1.2%.

Nationwide, the number of rigs in the U.S drilling for oil or natural gas declined by nine to 700. There were 538 rigs drilling for oil and only 162 for natural gas. Compared to last year’s rig total of 1,840 just ahead of Christmas, the nation’s rig count is down 62% year-over-year.

Among major oil- and gas-producing states, North Dakota and Wyoming each declined by three, Arkansas and Louisiana were down two, and Alaska, Colorado and Texas dropped one each. Oklahoma rig count rose by two. Kansas and New Mexico were up one each, while California, Ohio, Pennsylvania, Utah and West Virginia remained the same. Baker Hughes’ rig count, which is normally released on Friday.

Besides Southwestern, ExxonMobil’s XTO Energy and BHP Billiton, the next two largest producers in the Fayetteville Shale, have already shutdown drilling operations and pulled up stakes in the Arkansas shale play.

In October, BHP executives reiterated near-term plans to shut down its drilling and production operations in the Fayetteville and adjacent Haynesville shale plays despite the company’s forecast that both dry gas assets could support production for another 50 years. However, because of current economic conditions, Tim Cutt, president of BHP Billiton’s petroleum operations, said the company’s key focus for the Fayetteville and Haynesville shale plays is preserving their value for future production when prices rise above $3 per million British thermal units on the international futures market.

“But we know that we must get better in order to make the economic returns more viable in today’s price environment. That is precisely why I have challenged our team to become more efficient, reduce costs and safely achieve at least a 20% rate of return at a flat $3 Henry Hub gas price,” Cutt told Wall Street analysts in October. “Based on the significant strides we have made in our focus areas, I am confident we will get there in the near future.”

Although Southwestern officials have not revealed the company’s cost threshold for restarting its drilling operations, Gheit and other analyst have indicated that depressed oil prices now trading at around $35 a barrel and below $2 Henry Hub prices will push other oil and gas drillers to shut down production.

Southwestern spokeswoman Christina Fowler told Talk Business & Politics recently that the Houston oil and gas giant will unveil its 2016 capital budget in early January, which will include any spending and operation cuts in the Arkansas play that propelled the company to the top ranks of the natural gas drilling industry over the past decade.

In trading Wednesday, the Fayetteville Shale leader’s stock was soaring at 14.1%, up 83 cents at $6.71. That is well above the 52-week low of $5 that the company’s shares touched nearly a week ago on Dec. 17.  Southwestern’s shares are still down nearly 80% for the year.