What rig counts signal about drilling sentiment

What rig counts signal about drilling sentiment (Part 1 of 3)

Oil rigs drove US rig count decline last week

U.S. 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 (oil and gas). 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).

2013.12.23 - US Total Rig CountEnlarge Graph

Why oilfield service companies weren’t bullish on U.S. rig counts for the end of 2013

Most major oilfield service companies had commented that they expect U.S. rig counts (including both oil and gas) to be flat-to-down through 4Q13. 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. Part of the reason they expected fewer rigs is because 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 U.S. 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, service companies expect that normal seasonality heading into 4Q13 is likely to negatively impact U.S. rig counts, which also doesn’t imply negative sentiment, but is a regular annual slowdown due to the holidays.

U.S. rig counts dropped last week after having increased for the past six out of eight weeks

Last week, total U.S. rig counts decreased by 14, from 1,782 to 1,768. Plus, despite expectations that rig counts would be down through 4Q13, total U.S. rig counts have increased for the past six out of eight weeks.

Oil rig counts decreased from 1,411 to 1,395, while natural gas rig counts increased from 369 to 372. For further discussion of the trends in both natural gas rig counts and oil rig counts, please read the following parts in this series.

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