Why rig counts will be driven down in 4Q13

Why rig counts will be driven down in 4Q13 (Part 1 of 3)

Must-know: Why total US rig counts increased, led by oil rigs

US rig counts were up slightly last week

For the week ended November 1, total US rig counts were 1,742 compared to 1,738 the prior week. Oil rig counts increased from 1,357 to 1,376, while natural gas rig counts decreased from 376 to 360. The balance comprised rigs that Baker Hughes categorized as “miscellaneous,” which rose from five to six on the week.

2013.11.06 - US Oil and Gas Rig CountEnlarge Graph

US rig count trends depend on how much companies are willing and able to spend on drilling

Rig counts represent how many rigs are actively drilling for hydrocarbons. Baker Hughes, an oilfield services company, reports rig counts weekly. The company notes that rig count trends are “governed by oil company exploration and development spending, which is influenced by the current and expected price of oil and natural gas.” So rig counts can represent how confident oil and gas producers feel about the drilling environment. As rig counts show one measure of oil and gas drilling activity, the figure can also be a useful indicator to gauge the activity levels of oilfield service companies such as Baker Hughes (BHI), Halliburton (HAL), Schlumberger (SLB), and Weatherford (WFT), all of which are part of the Oil Services HOLDRs ETF (OIH).

Oilfield service companies aren’t overly bullish on US rig counts for the rest of 2013, but not because of weak fundamentals

Most major oilfield service companies commented that they expect US rig counts (including both oil and gas) to remain flat-to-down for the balance of the year. Companies such as Halliburton (HAL) noted that the driver of this trend is a switch to pad drilling (drilling more than one well on a single well site), which requires fewer rigs running to drill the same number of wells. However, this doesn’t translate into weak activity or a negative signal necessarily. Plus, producers have been able to realize other efficiencies from having gained experience in the relatively new shale plays they’ve started to drill over the past few years. The efficiencies have allowed for less money spent on oilfield services (including drilling) to realize the same amount of production.

Halliburton noted, “In spite of a relatively flat sequential U.S. rig count, drilling efficiencies in the trend towards multi-well pads are driving a more robust well count.” Producers are still eager to drill wells, and even if rig counts are flat, other services such as well completion are still needed, providing revenue to oilfield service names in the situation of higher well counts. See Higher well count and stage count helping US fracking market for more background. In recognition of this need, as a service, Baker Hughes has begun to report well counts alongside rig counts. Plus, normal seasonality heading into 4Q13 is likely to negatively impact US rig counts.

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