2013 is winding to a close, and the United States oil and gas industry will cement the year as one of the most productive in history. In October, the Energy Information Association predicted the U.S. will surpass Russia as the world’s top energy producer by year-end. America’s oil boom will continue through 2016, while its abundant supply of natural gas is expected to maintain its upward trend until 2040, replacing coal as the greatest source of electricity along the way. Since 2005, oil production alone has increased by 34%. The U.S. is already the world’s top producer of natural gas, and its total oil and gas production for 2013 is estimated at 22.2 MMBOEPD.
Production is up, but Rig Counts are Flat
The United States rig count on December 27, 2013, according to Baker Hughes (ticker: BHI), was 1,757. The count one year prior was 1,763. Despite the steadiness in rig count, a shift between rig type is apparent. Oil-based wells increased by 55 compared to the previous year (1,382 from 1,327) resulting in a decline of 57 gas wells (374 from 431). Horizontal rigs also climbed, totaling 35 more rigs (1,146 from 1,111) than in 2012. In turn, vertical wells decreased by 90 (387 from 477).
The climb in production despite a consistent rig count can be attributed to increasing industry knowledge and drilling efficiency. The benefits from hydraulic fracturing, geophysical advancements and drilling techniques have resulted in organic growth from plays. In fact, horizontal drilling now accounts for 61% of all land-based wells in the U.S., up from just 31% at year-end 2008. The new method, along with pad drilling, has contributed to increased well efficiency. The graph below, compiled by EnerCom, Inc., illustrates the rising efficiency on respective plays throughout the U.S.
Natural Gas is Cheap, but Still a Catalyst
The United States is already the world’s largest natural gas producer. The abundance of the resource has led to falling prices, forcing several E&P companies to increase focus on oil development and taper off gas production. However, the highly exploited Marcellus Shale has not seen any effects. If the shale were a country, its immense reserves would rank eighth in the world. The area’s infrastructure build out is increasing, with an additional 3.5 Bcfe of pipeline 
capacity expected to be in service by 2015. Prices in the area have traditionally traded higher than Henry Hub spot prices due to transportation costs from other gas plays. The EIA expects that trend may reverse as early as 2014.
The area is also benefitting from shut-ins being placed on line and consistently high local demand. According to the EIA, the drop in rigs has not affected the Marcellus’ growth since production was already in place.
Companies continue to ramp up their activity. In fact, Range Resources’ (ticker: RRC) predicts line-of-sight growth of 20% to 25% and recently reached a milestone of 1 net Bcfe/d of production in the region. Cabot Oil & Gas (ticker: COG) continues to be one of the premier players, totaling 1.5 Bcfd by year-end 2013. OAG360 notes investors are willing to pay up for future growth opportunities in the Marcellus. Compiled by EnerCom, the graph below reflects forward-year multiples per play, with the Marcellus-focused companies trading well above other basins in terms of median 2014E P/CFPS multiples. 
Texas Switching to Oil
The Marcellus natural gas boom created a very tall barrier to entry for natural gas production from the Haynesville and Barnett formations, prompting operators to pivot their production targets to crude oil. The Barnett shale is being produced at the lowest rate in a decade, and drilling permits are at its lowest number since 2000. The number of drilled wells is expected to be the least since 2005.
On the other hand, oily plays like the Eagle Ford and the Permian are in line for substantial exploitation in 2014. An additional 50 to 70 horizontal wells will be added to the Permian in the upcoming year. Devon Energy (ticker: DVN) and Concho Resources (ticker: CXO) have each allotted 2014 Permian spending to grow by more than 30%. According to the Texas Railroad Commission, more than 27,000 drilling permits have been issued since January 2011.
The Eagle Ford is poised to reach record local production levels. Thomas Tunstall, research director at the University of Texas at San Antonio Institute for Economic Development, says the play has the capacity for drill 25,000 wells over the course of its life. Devon Energy’s interest in the Eagle Ford was so high it spent $6 billion to acquire 82,000 net acres in the play on November 20, 2013. While the Permian has historically been a more consistent and prominent producer, the investment in the Eagle Ford has it primed for massive production increases, evidenced by the EIA graphs below.
Oil is expected to continue its upward trend, and analysts believe both the Permian and Eagle Ford will produce more than 1 MMBOPD in 2014. In September 2013, Texas produced 2.7 MMBOPD (35% of U.S. oil production), enough to single handedly rank among the top 15 oil producers in the world. Its production outpaces several OPEC members, including Venezuela, Alger
ia and Nigeria. Mark Perry, a professor at the University of Michigan’s School of Management, noted the state’s oil production has increased by more than 25% year-over-year for 25 straight months. The most recent year featured a rise of 30%.
Total U.S. production is expected to reach 8.2 MMBOPD in 2014, with the two Texas oil plays being the key drivers.
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