By Jason Womack
Of DOW JONES NEWSWIRES
HOUSTON -(Dow Jones)- A backlog of uncompleted natural gas wells could prove to be a boon for oilfield-services companies -- and help keep natural gas prices down should demand for the fuel improve.
The number of these uncompleted wells has grown, as producers have been reluctant to bring more new production online in an already saturated natural gas market, at least until they lock in prices for their 2010 natural gas output. Producers have also drilled these incomplete wells to maintain their rights to some natural gas leases, while waiting for natural gas prices to rebound. Front month natural gas futures, which settled Tuesday at $5.161 a million British thermal units on the New York Mercantile Exchange, are still down more than 60% from their summer 2008 highs.
Halliburton Co. (HAL) Chief Executive David Lesar said last week that producers have left between 1,300 and 1,500 wells unfinished in North America. "This will be very positive for us when this completion backlog is worked off in 2010," he said in a conference call with analysts.
The rush to complete unfinished wells could boost service company activity, as it is the most expensive stage in the drilling process, accounting for roughly half the cost of a natural gas well. Completing thousands of wells could also help pad natural gas supplies next year, even if the rig count remains low. The North American rig count is often used as a measure of demand for oilfield services and by commodity analysts as an indicator of where gas supplies are headed. The number of rigs drilling for natural gas has fallen by more than half over the last year.
The declining rig count has weighed heavily on service company earnings over the last year. Both Halliburton and Weatherford International Ltd. (WFT) have reported substantially lower third quarter earnings this year over last amid the slump in North American drilling.
Companies that could benefit the most from a major industry-wide effort to complete wells include Schlumberger Ltd. (SLB, SLBS.VI), Halliburton and Baker Hughes Inc. (BHI), which recently agreed to acquire completion specialist BJ Services (BJS), said Bill Herbert, an analyst with Simmons & Co.
While many analysts expect to see some recovery in natural gas prices next year as production declines, the uncompleted wells could bolster gas supplies, pumping more gas into the market and muting the impact an economic rebound would have on prices.
"The real fear people have is that there will be a wall of gas supply," said Dave Pursell, an analyst with the Houston-based investment bank Tudor Pickering Holt & Co.
-By Jason Womack, Dow Jones Newswires; 713-547-9201; jason.womack@dowjones.com