U.S. gas drilling activity has experienced some recent weakness. However, HP’s rigs reduce drilling time per well, can move more quickly from well to well, and can drill with increased precision and measurability. Thus, even though HP charges premium day rates, users of its FlexRigs can significantly reduce their total costs per well, giving HP a competitive advantage. Most users continue to use HP’s rigs because they appreciate the rigs’ benefits. In addition, when a new operator uses one of HP’s rigs, it is likely to become a regular client – the company has added several operators to its customer list since 2001. As a result, HP is better-positioned in the event that sustained low natural gas prices cause a reduction in drilling activity. While declining natural gas prices could lower HP’s day rates, its rigs are more likely to keep working, providing some downside protection if the environment become more difficult. The company has the potential to meaningfully expand its international operations.

Chesapeake’s growing natural gas production and robust hedging strategy should lead to strong earnings growth. Chesapeake’s drilling activity is focused on the major U.S. shale plays east of the Rockies. As a result, it has competitive advantages in terms of operating scale, deep-drilling expertise, and seismic data. The company does not have any drilling activity in the U.S. Gulf of Mexico or outside the U.S., which also reduces its exposure to operational and geopolitical risk. Its ownership of its own drilling rigs, rare for an E&P company, is another positive. In addition, the difficulties associated with transporting natural gas limit its availability for export. As oil production from Canada’s oil sands grows, the U.S. will be able to import less gas, benefiting U.S. gas producers like Chesapeake. The company’s 10-year drilling inventory backlog of nearly 26,000 drill sites should allow it to keep growing and keep its finding costs at a reasonable level.