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 Dec. 4, reflecting ramped-up drilling activity by the producers amid recent optimism about an economic recovery and higher prices relative to last year.
As shown in the first chart below from Baker Hughes, rigs exploring and producing in the U.S. totaled 1,141 during the week. This is up by 4 from the previous week’s tally and represents the seventh successive weekly gain. The current nationwide rig count is 30% 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 711 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. remained flat at 748, following a big gain of 22 in the previous week. The rig count remains 53% lower than its peak of 1,606 in late summer 2008. In the year-ago period, there were 1,428 active natural gas rigs. This is shown in the following chart, also from Baker Hughes.
The oil rig count was up by 4 to 383, maintaining the positive momentum from the past eleven weeks. But the tally is down approximately 7% from the previous year’s count of 413, as shown in the following chart from Baker Hughes. Oil rigs peaked at 442 in early November last year.
The number of miscellaneous rigs, at 10, remains unchanged from the previous week.
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 more than 100% since last December’s lows, while gas futures have almost doubled 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 have recently hit a new record high of 3.84 trillion cubic feet (Tcf) and is poised to surpass the maximum capacity of 3.89 Tcf shortly. 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 53% 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 26% 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 colder weather 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 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.
We are positive on 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 “SII”
Read the full analyst report on “NBR”
Read the full analyst report on “PTEN”
Read the full analyst report on “HP”
Read the full analyst report on “CAM”
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