In one of its periodic “Oil Service Ruminations,” Simmons & Co. examined major service companies’ recently announced fourth quarter earnings along with data about gas storage and hedging. A combination of well-hedged E&P companies, replenished balance sheets and extremely cold weather in much of the country has led to better-than-expected drilling activity. Will this trend continue?

“One the one hand, we believe the surge in drilling activity will continue, perhaps at a less frenzied pace than witnessed year-to-date,” the report states, noting that an improvement of 36 rigs per week is the strongest recovery witnessed in decades. With most budgets anticipating a US$5 to $5.50/MMBtu 2010 strip, this should help maintain an improvement in the rig count. But non-weather related natural gas data points like industrial demand and production have been “abysmally bad.” “We believe we have some running room (perhaps until early to mid-summer) before a day of judgment is reached in revising ’10 budgets which, to date, have been much better than expected coming into the year,” the authors write.

Meanwhile, the need for “another epic cold blast” is huge. “In the event we aren’t the beneficiaries of another epic cold front, then those elusive production declines need to kick in, and with vigor, or industrial demand needs to awaken. Otherwise, we will witness, for a period of time, increasing drilling activity and unraveling natural gas process.”

Oil, on the other hand, is having a bit of a renaissance. Oil-related activity now makes up almost 35% of total domestic drilling, the highest since the mid- to late ‘90s. This makes the U.S. drilling market better balanced than it has been in a long time. But here, too, the fundamentals are challenging. Non-OPEC (Organization of Petroleum Exporting Countries) production is not declining, U.S. and broader OECD (Organization for Economic Co-Operation and Development) demand, “to be polite, is anemic.” More production from Iraq can materially change OPEC spare capacity, and oil prices “appear to have ‘recorrelated’ with the U.S. dollar.” Finally, front month oil prices for West Texas Intermediate have dropped from the mid $80s/bbl to the low $70s/bbl in just the last three weeks.

With all of these complications, the company suggests that companies strive for balance in their portfolios. – Rhonda Duey, from Hart’s E&P Magazine