Natural gas prices in the U.S. increased to $2.53 per Million British thermal units (MBtu), increasing from a low of $1.90 / MBtu in April as producers cut back on gas exploration and exports of the commodity to Mexico ramped up.  Gas exports to the country have spiked in the month of May, helping U.S. gas producers lease the oversupply situation and allay fears that underground storage shortages would pull gas prices below $1 / MBtu. Despite the price rise, analysts contend that producers will still be making losses on gas sales and the gas rig count is continuing its downward spiral, balanced by an uptick in oil exploration. Rig counts are directly tied to exploration spending and to the income of oilfield services players such as Halliburton (NYSE:HAL).
We are looking to revise our $43 price estimate for Halliburton, which is at a 50% premium to its current market price.
U.S. gas exports to Mexico reached a record 1,867 Million cubic feet / day (Mcf/d) in the month of May according to Bentek Energy.  Despite the low gas prices in the country, American producers have limited options to export their output because of regulation on export of the product to countries with which the U.S. does not have free trade agreements and the the lack of LNG facilities to ship gas to international markets.
Consequentially, the present oversupply has pushed down prices and stoked fears that the country could run out of underground storage in the near future. However, companies have been able to tap the market in Mexico, using an already existing pipeline network. The exports have helped prices recover to a certain extent, but the rig count for gas exploration has continued to fall.
Some analysts say that the price of gas should be at least double from its present levels for explorers to make a reasonable return on their investments.  Gas exploration in the U.S. has fallen drastically this year as producers shifted focus to oil rich plays in the U.S., hitting Halliburton’s margins as the company had to realign its operations to counter the shift. (See: $2 Natural Gas Could Hit Halliburton’s Exploration Business)
The company’s margins are set to see a further drop this quarter because of shortage of key input materials for hydraulic fracturing. The shift from gas to oil drilling is also resulting in higher competition, lowering Halliburton’s ability to push the costs to its customers. Dropping margins in the U.S. could have a major impact on the company’s valuation.
- Halliburton Warns On Higher Fracking Costs (trefis.com)
- The US Natural Gas Industry Is A Stunning Misallocation Of Capital, Business Insider [↩] [↩] [↩]