SocGen: ‘This Time Is Different’ For North American Natural Gas

Athabasca oil sands digger

Shares of some of the biggest fossil fuel drillers have been struggling recently.  Halliburton’s stock has been off nearly 34% in the past six months.  Baker Hughes is down 38% in the same period.

Both stocks have taken a beating, as investors worried about the impact falling natural gas prices would have on spending and drilling activity.

But a new report by Societe Generale analyst Edward Muztafago argues that the outlook for multi-service companies like Halliburton and Baker Hughes isn’t that bad.

Historically, drilling activity had been dominated by conventional drilling methods, which would justify some investors’ concerns related to weak natural gas activity.

But “this time it’s different,” argues Muztafago.

Unconventional drilling is now having a more profound impact on the industry.  While natural gas rig activity has declined, unconventional drilling (i.e. removal of oil and gas using methods other than the conventional oil well) as a whole has been a driver on North American spending.  And there is one crucial difference between unconventional oil drilling and unconventional gas drilling: oil and liquids drilling activity is growing rapidly while gas drilling is on the decline. Furthermore unconventional oil rig activity outnumbers natural gas activity 2 to 1.  From the report:

“…As much as 75% of NAM [North American] services revenue is now generated by oil and liquids directed drilling activity according to our calculations and we don’t think this is widely understood on the Street. As the spending mix shifts further to oil / liquids development NAM services revenue should grow.”

Here’s a chart from SocGen that shows that unconventional oil/liquids drilling activity now outweighs unconventional gas drilling by a 2:1 ratio in North America:

rig activity

The shift towards oil and liquids drilling in North America is being driven by strong crude prices, better technology, and better understanding of oil shale geology, according to Muztafago. Oil directed drilling activity in North America is up to 60% of total rig count, compared with 15% – 20% for unconventional dry gas during its reign between 2005 – 2008.

SocGen has buy ratings on Haliburton and Baker Hughes.

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