Softening natural gas prices may be the lump of coal in two legacy name shale stockings this holiday season.

Rig count continues to soften in both the Barnett and Haynesville shales as operators near the end of lease capture efforts in the Haynesville and face challenging economic headwinds in the Barnett.

Barnett rig count has languished below the 60-unit market for the last 90 days and fell to just 50 units active with two weeks left in 2012. One has to contact Charles Dickens’ Ghost of Christmas Past -- namely 2004 -- to find the last time Barnett numbers resided in the sub-60 unit range.

Meanwhile, rig count in the core Haynesville parishes in northern Louisiana remained below 60 units for the second consecutive week. It is the first time Haynesville rig count failed to exceed 60 units since the dark days of January 2009, when the industry was in free fall in the wake of the late 2008 commodity price collapse.

Apparently dry gas is not the place the Beverly Hillbillies want to be at the end of 2012.

Haynesville operators like Comstock Resources Inc. are materially reducing gas rig count from 7 in 2010 to 1 by 2012, which is just enough activity to hold the company’s Haynesville acreage. QEP Resources Inc. is cutting Haynesville capex from 30% of the company’s 2011 allocation to less than 20% in 2012 with a corresponding drop in rig count from 6 units to 2.

Additionally, Haynesville stalwart EXCO Resources Inc. also plans a reduction in Haynesville activity in 2012. The company is employing 22 rigs in its joint Haynesville/Bossier shale exploitation program, but expects to cut that deployment by five to seven units in early 2012 depending on the trajectory of natural gas prices. EXCO is turning the greater portion of its 2012 efforts to exploiting the Bossier shale in lieu of the Haynesville.

Meanwhile SM Energy Co. has just seven wells to drill and $85 million to $95 million to invest before all of its Haynesville acreage is HBP, which will occur in 2012. Like Comstock, SM Energy plans to hold its Haynesville acreage rather than sell because of the potential rapid upside if gas markets improve, and because some of that acreage is also prospective for Bossier shale.

It was telling perhaps that there was only one mention of the word “Haynesville” in Chesapeake Energy Corp.’s third quarter earnings conference call. Chesapeake is by far the largest Haynesville player. Of the 1,644 producing Haynesville wells in October 2011, Chesapeake had drilled 513, or 31% of the total, according to the Louisiana Department of Natural Resources. In fact just four operators account for two thirds of Haynesville producers, including Chesapeake, BHP-Billiton (formerly Petrohawk) with 221 wells, EXCO with 207 wells and EnCana Corp. with 185 wells.

Chesapeake’s third quarter Haynesville mention? Well, it was only to comment that the land rush for the Ohio Utica shale play was the biggest event since the 2008 Haynesville land rush.

Chesapeake’s non-operating Haynesville joint venture partner is Plains Exploration & Production Inc. Plains noted in its third quarter call that its joint venture operating partner had cut Haynesville rig count from 31 units to 21 as the lease capture program wound down. Plains, by the way, does not expect to become cash-flow positive in the Haynesville until 2013 as rising development costs in association with the scramble to capture remaining leases collides head-on with low natural gas prices.

Barnett shale rig count peaked at 180 units in October 2008, thanks to the rapid adoption of horizontal drilling and multi-stage slickwater fracture stimulation. The Barnett’s jump from 60 rigs to more than 180 defined a remarkable era that marked the debut of shale gas on the unconventional stage. Prior to 2005, the term “unconventional gas” mostly referenced either coalbed methane or tight sands in the Rockies. The Barnett shale expanded that definition to incorporate shale gas.

The Haynesville shale put the exclamation point on that change when the play burst on the scene in early 2008. At that time, rising natural gas prices underwrote a profligate land rush in Louisiana that brought some surface owners more than $25,000 per acre.

Turns out that land grab occurred within months of the summer 2008 peak in commodity prices. If the Barnett shale was developed during a period of rising natural gas prices, the Haynesville shale began development during a period of decreasing gas prices. High IP rates, large recoveries and excessive drilling underwritten by joint ventures, hedging, or the need to capture leasehold acreage exasperated the oversupply in domestic natural gas that in turn had a further depressing impact on natural gas prices.

So the decline in rig counts for the two-name legacy shale plays is an interesting coda to the 2011 story.

But declining natural gas prices only tell half the story. It seems there is one other factor in declining rig count. And that factor is improving efficiency for each play’s most successful operators. Efficiency gains are evident in the fact that gas production in both plays continues to rise despite lower drilling levels.

In the Barnett shale, current rig count is less than one third the peak, yet gas production, at 5.5 Bcf/d, is higher now than it was three years ago.

Similarly, rig count in the Haynesville peaked in the second and third quarters of 2010 at 120 units active in the four Louisiana parishes that comprise the play’s sweet spot. Despite a 50% decline in rig count, Haynesville production continues to grow and exceeds 6.5 Bcf/d, according to EnCana Corp. -- or 10% of U.S. natural gas production.

While service cost inflation has been tough, operators are getting more bang for their buck. QEP Energy has seen Haynesville drill times drop from 66 days in 2009 to 37 in 2010, and 32 in the third quarter 2011. Similarly average completion times fell from 7 days in 2008 to 4 days in 2010, and 3.25 days in third quarter 2011.

Those efficiency gains suggest that the main takeaway on the Haynesville is that the play has entered the gas factory stage for a handful of elite operators.

EnCana best represents the new Haynesville story. The Canadian-based resource player discovered the Haynesville in 2006, partnered with Shell in late 2007, and has moved production on its 350,000 acres from 10 MMcfed in 2008 to 505 MMcfed in 2011.

With acreage capture efforts completed, EnCana is now focused on a resource play hub development strategy that features pad drilling, longer laterals and optimized spacing. On the cost-efficiency side, EnCana is even using natural gas powered drilling rigs to bore longer horizontal laterals and vertically integrating fit-for-purpose completion programs on its pads to reduce cycle time, increase the percentage of gas harvested, and drive costs low enough to support development in a low-cost environment. One frac crew recently completed 145 stages in 30 days.

But the story is the same among the best performing operators. Sewer rigs are drilling wells faster while fracture stimulation crews are completing more stages at lower per unit costs.

Farther west, EnCana Corp recently sold its Barnet shale acreage to EV Energy Partners, which is now using modified completion techniques to generate greater gas recoveries in the nation’s most mature onshore shale play. That fact that operators are able to impose the MLP structure on an aging shale basin affirms that the end of dry gas is not nigh. Rather, unconventional shale dry gas development is evolving into a new phase that requires fewer, better rigs to sustain production volume growth.

Contact the author, Richard Mason, at rmason@hartenergy.com.

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