Strong Rig-build Cycle & Shift Toward Higher Specs
Edward C. Muztafago
TWST: Some news outlets have reported that the unusually warm weather has not been kind to the drilling industry. Is that true?
Mr. Muztafago: The reality is, it hasn't been kind to the stocks, but the actual industry itself has fared relatively well. I think there is really a bit of a misperception on the part of buy-side community right now that the weak natural gas prices are going to cause some precipitous collapse in drilling activity. Unlike the past cycles, this cycle is very much driven by oil and liquids, or oil, natural gas liquids, NGLs, and oil condensate. The economics of that clearly are much better than natural gas prices would indicate. If you look at Baker Hughes' (BHI) rig count, what it says is that 40% of the rigs in the U.S. are still drilling for gas, but in reality we think probably anywhere between 40% to maybe on the outside 50% of those rigs are really drilling very heavy liquids-rich targets. So it's a little bit of a loose correlation to say that the economics of those rigs are driven by the weak gas prices. They're really driven by liquids, and whether condensate or NGL, it's priced off of oil. And so that can materially alter the economics of drilling new wells.
TWST: We've seen this big dichotomy between oil prices and gas prices. What's the impact?