U.S. Rig Count Grows by 20 - Analyst Blog

In its weekly release on Friday, Houston-based oilfield services company Baker Hughes Inc. (BHI) reported another rise in the number of rigs searching for oil and gas in the U.S., reflecting ramped-up drilling activity by the producers amid recent optimism about an economic recovery and higher prices relative to last year.

Rigs exploring and producing in the U.S. climbed to 1,161 for the week ended Dec. 11 (as clear from the first chart below from Baker Hughes). This is up by 20 from the previous week’s tally and represents the eighth successive weekly gain. The current nationwide rig count is 33% higher from the 2009 low of 876 (set in the week ended June 12).

However, the combined oil and gas rig count is still down by 629 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 9 to 757, the sixteenth gain in last 21 weeks. However, the rig count remains 53% lower than its peak of 1,606 in late summer 2008. In the year-ago period, there were 1,379 active natural gas rigs. This is shown in the following chart, also from Baker Hughes.

The oil rig count was up by 10 to 393, maintaining the positive momentum from the past 12 weeks. But the tally is down approximately 2% from the previous year’s count of 401, 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 11.

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, during recent weeks, there have been signs that companies were beginning to bring rigs back on line amid signs of economic stabilization that could drive up energy demand.

Oil prices have increased approximately 100% since last December’s lows, while gas futures have also gained significantly from lows reached this September. This pushed the nationwide rig count above 1,100 working units for the week ended Nov. 13 for the first time since March.

The overall picture, though, remains weak, particularly for natural gas, whose inventories remains nearly 16% above their five-year average and much higher than the normal range at this time of the year. But while drilling has declined significantly over the past twelve months, production has not slowed that much.

Thus there is a feeling that more rig cuts may be required to bring the oversupplied market into equilibrium, particularly with gas inventories at record levels and industrial demand still down sharply due to a lackluster economy.

The bulk of the decline in rig counts has occurred in vertical gas drilling rigs, which drill straight down in search of conventional gas deposits. The number of vertical drilling rigs has dropped by about 50% over the last year.

On the other hand, horizontal/directional rigs (a new drilling technology that have the ability to drill and extract gas from dense rock formations, also known as shale formations) have fallen at a much slower pace, down only 23% from the year-ago period, as depicted in the following chart from Baker Hughes. Consequently, gas production from the highly prolific shale plays have continued to surge, fueling the glut in domestic natural gas volumes over the last few years.

The supply picture is expected to reverse in the coming months as producers bet on demand for heating in a cold winter season and 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 of the above-mentioned companies.

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 an Underperform recommendation on the company.

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

U.S. Rig Count Grows by 20 – Analyst Blog

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