A funny thing happened on the way to doomsday in natural gas. Someone forgot to tell the industry that the end is nigh.

That someone may be the oil and gas price gods.

Sure, the god of gas pricing has forsaken the industry. But the god of liquids pricing is showering tender mercies on the industry to make up the difference.

Hart Digital Media updated its monthly oil and gas revenue model through November, or the last month for which comprehensive data is available from the U.S EIA. And while the model doesn’t incorporate January’s startling natural gas price collapse (or the concurrent weakness in Midcontinent ethane), industry revenue remains strong enough to encourage continued field activity, at least for the time being.

It’s going to take an extended run of puny natural gas prices to negatively impact activity levels.

November 2011 Domestic Production Generates $27.7 Billion

Think of oil and gas revenues as the oxygen that keeps industry activity vibrant. Whether the dollar originates from oil, gas, or natural gas liquids (NGLs) is immaterial at the macro level. When industry revenue flows are rising, field activity reflects this and tends to swell with a lag of 90 to 120 days. When those revenues drop, rig count tends to follow.

Thus, November 2011 revenue flow should be reflected in rig count levels during the next 30 to 60 days at or near current levels. In fact, the Hart Unconventional Activity Tracker underscores this in part with a total land count of 1,568 units turning to the right as of Friday, Feb. 3. Activity levels were actually up 1.3% versus the four week running average during a time of year that normally registers weather-related disruptions.

The model identified $27.7 billion in revenue for November, or a total revenue flow basically unchanged from October. In fact, domestic revenue flow has topped $27 billion for eight of the last nine months and remains well above the $20.9 billion marker from September 2010 that constitutes the most recent low. (Figure 1)

Graph shows the mix of oil, natural gas and NGL revenues by month in the domestic oil and gas industry. The heavy line across the center shows the level of revenue flow if January’s natural gas prices had been applied to natural gas production in November 2011, the last month for which data is available.

The Hart revenue model estimates dollar flow for domestic oil, NGLs, and natural gas production.

Impact Of Sub-$3 Gas

Of course, November seems like a lifetime ago after natural gas prices collapsed in January. Still, projecting the natural gas price regime from January 2012 back onto November 2011 production has the net impact of reducing industry top line revenues $1.6 billion. The result is a monthly revenue flow number that remains above $25 billion and still exceeds anything the industry experienced in 2010.

January’s lower natural gas prices have not yet played a major role in overall industry activity levels and likely won’t manifest in a meaningful way for several more months.

The bigger change near-term is in expectations about the industry. Previously the outlook for 2012 activity, as measured by rig count, called for a rise of 7% to 10% versus 2012. The subsequent collapse in gas prices has not yet prompted anyone to project a decline in overall drilling activity. Rather, the difference is industry observers are ratcheting back 2012 expectations to a market that features a rig count that is flat in comparison to 2011, or up incrementally at best.

The argument in the newly evolving consensus is that rising drilling in oil or liquids basins will offset declining drilling in gas basins.

There are implications. For one, field costs are higher now than they were a year ago. Consequently fans of bullish conditions in pressure pumping need to come to terms with the fact that margins have peaked in the U.S. and could contract noticeably in coming quarters, depending on the pace at which new capacity is added to the domestic market.

Otherwise, the doomsday scenario may well be overstated at the present time.

Oil and NGL Revenues Offset Falling Gas Revenues

Monthly revenue tied to November natural gas production came in at $6.6 billion, which is reflective of late 2010 dollar volumes. The figure is well below the $8.3 billion recorded in July 2011, which serves as the most recent monthly peak in natural gas monthly revenue. Conversely, the lowest monthly revenue since the 2008 commodity price peak occurred in July 2009 when natural gas generated a mere $4.8 billion.

The exercise of applying January 2012 gas prices to November 2011 production generates a monthly revenue flow of $5.5 billion, which corresponds with industry volumes during the third quarter 2009 as the industry bottomed in the post-2008 commodity price collapse.

On its face, that would be a worrisome number. However, natural gas revenues in the $5 billion range in 2009 reflected 30% of total industry revenue flow. Gas revenues at that same level now reflect only a 20% share of industry dollar flow, according to the Hart revenue model. For perspective on how the market has changed, consider the fact that natural gas revenues accounted for more than 60% of domestic industry revenue flow as recently as December 2008.

Easing the January 2012 gas price pain is the fact that other commodities are stepping to the fore. In November, revenues tied to domestic oil production topped $17.6 billion, the second highest total since July 2008. Oil revenues accounted for 63.7% of industry dollar flow in November, falling just shy of the 64.4% recorded as oil prices peaked in May 2011.

NGLs, meanwhile, came in at $3.4 billion in November 2011, marking the eighth time in the last nine months that NGLs provided in excess of $3 billion to the revenue mix. On a percentage basis, NGLs generated 12.4% of industry revenue in November 2011 for the second month running. It was the third time in the last eight months that NGLs exceeded 12% of industry revenue.