Natural Gas Production

Since mid-2011, natural gas production has increased even though there are fewer natural gas-targeted rigs in operation.

The U.S. Energy Information Administration, or EIA—in its “Short-Term Energy Outlook,” that was released in February 2015—reported that dry natural gas production is set to increase to 72.80 billion cubic feet, or Bcf, per day in 2015 and to 74.38 Bcf per day in 2016. In 2014, the EIA expects the US to produce 70.17 Bcf per day of dry natural gas.

As a point of reference, the EIA believes natural gas production averaged an estimated ~69.3 billion Bcf per day during the first half of 2014. In keeping with the trend, US dry natural gas production surged 5% in December 2014 over the previous month.

In contrast, the number of natural gas rigs has continued to decline over the past three years. From ~930 in October 2011, the count is now down to ~300 as of February 2015.

The EIA’s preliminary data show that natural gas production growth is set to continue into 1Q 2015. Higher production in the Marcellus, Eagle Ford, and Utica is driving the trend. Some key energy companies that will benefit from higher production in these shales include CONSOL Energy (CNX), EOG Resources (EOG), Chesapeake Energy (CHK), and Pioneer Natural Resources (PXD). For broader exposure to the energy market, investors might consider the Energy Select Sector SPDR ETF (XLE).

A Counterintuitive Trend

A number of factors combined to develop this trend. First, while companies have targeted oil because it’s more profitable, most oil wells also have significant natural gas production. So, increased oil-targeted drilling has contributed to higher levels of natural gas production.

The declining number of oil-targeted rigs in the past four months will eventually lead to lower natural gas production. But it may take a few quarters before any noticeable decrease occurs.

Another contributing factor is the development of super-prolific areas like the Marcellus Shale. Wells in the best areas of these plays have extremely high natural gas production rates. They also have very low costs per unit of production. This makes drilling them profitable—even when gas prices are low.