According to data from Baker Hughes Inc. (BHI), the number of rigs searching for oil and gas in the U.S. rose for the week ended Oct. 9, reflecting ramped up drilling activity by the producers amid recent optimism about commodity price recovery. As shown in the first chart below from Baker Hughes, rigs exploring and producing in the U.S. totaled 1,041 during the week. This is up by 17 from the previous week’s tally and is 19% higher from the 2009 low of 876 (set in the week ended June 12).

The combined oil and gas rig count is down by 949 from the year-ago period. It rose to a 22-year high in 2008, peaking at 2,031 in the weeks ended Aug. 29 and Sept. 12.

The number of natural gas rigs drilling in the U.S. increased by 14 to 726, the eleventh gain in last twelve weeks. However, the rig count still remains 55% lower than its peak of 1,606 in late summer 2008. In the year-ago period, there were 1,548 active natural gas rigs. This is shown in the following chart, also from Baker Hughes.

The oil rig count was up by 2 to 305, maintaining the positive momentum from the past three weeks. But the tally is down nearly 29% from the previous year’s count of 429, as shown in the following chart from Baker Hughes. Oil rigs peaked at 442 in early November last year.

The number of miscellaneous rigs was up by one, to 10.

Producers had scaled back oil and gas drilling operations over the past several months in the midst of falling commodity prices and tighter access to credit. However, the recent numbers suggest that companies are beginning to bring oil and gas rigs back on line amid signs of economic stabilization that could drive up energy demand.

The overall picture, though, remains weak, particularly for natural gas, whose inventories have recently hit a new record high of 3.66 trillion cubic feet (Tcf) and is threatening to test the maximum capacity of 3.89 Tcf. The supply picture is expected to reverse in the coming months as the lagging effect of the sharp drop in domestic drilling activity takes hold.

Until then, we believe that natural gas woes (especially in North America) will continue to haunt energy service firms like Halliburton Company (HAL), Schlumberger Limited (SLB), Baker Hughes, National-Oilwell Varco (NOV) and Weatherford International Ltd. (WFT). These oilfield service names have seen their revenues and earnings plunge in the last few quarters on the back of lower volumes and a very competitive pricing environment. We have Neutral recommendations on all the above-mentioned companies.

We also maintain our Neutral recommendations for land drillers such Nabors Industries (NBR) and Patterson-UTI Energy (PTEN), given the extent of excess capacity in the sector that is expected to weigh on dayrates and margins well into next year.

In particular, we remain wary of oilfield service providers like Smith International Inc. (SII), given its high North American exposure (from the W-H Energy acquisition) in the face of a collapse in the region’s drilling activities. We have Underperform recommendation on the company.

We prefer to own oilfield companies like Cameron International (CAM) that derives about two-thirds of its revenue from outside North America. Cameron’s international operations are expected to be a key growth driver for the firm going forward and will play an offsetting role to the relatively soft U.S. drilling scene.
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 “WFT”
Read the full analyst report on “NBR”
Read the full analyst report on “PTEN”
Read the full analyst report on “SII”
Read the full analyst report on “CAM”
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