In its weekly release, Houston-based oilfield services company Baker Hughes Inc. (BHI) reported a rise in the U.S. rig count (number of rigs searching for oil and gas in the country), driven by intensified drilling activity by the oil producers that more than offset a decline in the natural gas rig count.
Rigs exploring and producing in the U.S. totaled 1,535 for the week ended May 28, 2010 (as clear from the first chart below from Baker Hughes). This is up by 17 from the previous week’s tally and represents the highest level since the week ended January 16, 2009. The current nationwide rig count is 75% higher from the 2009 low of 876 (set in the week ended June 12) and significantly exceeds the prior-year level of 899. It rose to a 22-year high in 2008, peaking at 2,031 in the weeks ended August 29 and September 12.
The natural gas rig count decreased for the fourth time in the last 6 weeks to 967 (a loss of 2 from the previous week). Despite the week-over-week decline, the number of natural gas rigs is just 6 short of the 14-month high of 973 hit during the week ended April 16. The U.S. gas drilling rig count has rebounded strongly after bottoming to a 7-year low of 665 on July 17, 2009. Still, the rig count remains 40% lower than its peak of 1,606 in late summer 2008. In the year-ago period, there were 703 active natural gas rigs. This is shown in the following chart, also from Baker Hughes.
The oil rig count was, however, up by 17 to 555, the third gain in last 4 weeks. The current tally is considerably higher than the previous year’s count of 187, as shown in the following chart from Baker Hughes. It has recovered nicely from a low of 179 in June 2009, more than tripling in number.
The miscellaneous rig count, at 13, was up 2 from the previous week.
Producers had scaled back oil and gas drilling operations over the past year (leading to a drastic reduction in rig count) in the midst of falling commodity prices and tighter access to credit. However, during recent months, companies have been beginning to bring rigs back on line amid signs of economic stabilization that could drive up energy demand.
Amid this growing optimism and expectations of faster-than-expected economic recovery, oil prices recently hit an 18-month high, climbing towards $86 per barrel. This pushed the nationwide rig count above 1,500 working units for the week ended May 14, 2010, for the first time in more than a year.
However, during the last few days, concerns about the European debt crisis and China’s growth outlook have renewed apprehensions about the global growth and energy demand. As a result, oil prices have slumped to around $72 per barrel. Additionally, high levels of product inventories (gasoline and distillate stocks remain above the upper boundary of the average range for this time of year), along with soaring commercial oil supplies, has further dragged down crude prices, in our view.
In the near future, we expect the commodity to trade in the $70 – $80 per barrel range in, supported by the rising consumption in emerging and developing economies, led by Asia.
The overall picture, though, remains weak, particularly for natural gas. The specter of a continued glut in domestic gas supplies still exists, with storage levels remaining 16% above their five-year average.
Further pressurizing the commodity is the rapid rise in the number of drilling rigs working in the U.S. (the natural gas rig count has climbed 45% from a seven-year low reached last July) that signals a supply glut later this year in the face of sluggish industrial activity. Meanwhile, production from dense rock formations (shale) remains robust and demand from power plants remains soft.
There are concerns among traders that the market will be oversupplied in the short- to medium-term, with rig counts going up and industrial demand still struggling due to the weak economy.
On the whole, we believe that natural gas fundamentals remain bearish, while the outlook for oil drilling remains robust. But this does not mean that we will not see any short-term pullbacks in crude prices (like the present one).
Taking this into consideration, we look to maintain our cautious outlook on diversified service firms like Halliburton Company (HAL), Schlumberger Limited (SLB), National-Oilwell Varco (NOV) and Baker Hughes.
Land drillers such as Nabors Industries (NBR), Patterson-UTI Energy (PTEN) and Helmerich & Payne (HP) are also expected to remain under pressure. Although we expect the land rig count to continue with its steady rise during 2010, the large amount of excess capacity in the sector will weigh on dayrates and margins well into the year.
All the above-mentioned companies currently have Zacks #3 Ranks (Hold), meaning that these stocks are expected to perform relatively the same as the overall market during the next 1-3 months. Therefore, investors should maintain their current positions in the stocks over this time period.
Read the full analyst report on “BHI”
Read the full analyst report on “HAL”
Read the full analyst report on “SLB”
Read the full analyst report on “NOV”
Read the full analyst report on “NBR”
Read the full analyst report on “PTEN”
Read the full analyst report on “HP”
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