Must-know: Why rig counts matter, and where they're increasing

Must-know: Why rig counts matter, and where they're increasing (Part 1 of 3)

The reason behind the 6% increase in the US rig counts this year

The U.S. rig count trends show how much inclination companies have toward 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), and Schlumberger (SLB), all of which are part of the Oil Services HOLDRs ETF (OIH) and the Energy Select Sector SPDR (XLE).

2014.05.05 - US Total Rig CountEnlarge Graph

 

The U.S. rig counts decreased last week, but are up 6% year-to-date

The U.S. drilling rig counts decreased by 7, from 1,861 to 1,854, during the week ended May 2, according to the latest Baker Hughes report. While oil rig counts decreased by 7, the number of gas rigs remained unchanged.

Year-to-date, the total U.S. rig count has increased by 103, or 6%. Oil rigs have increased by 149 (11%), while natural gas rigs have declined by 49 (-13%). To read further about oil and natural gas rig count trends, continue to the following parts of this series.

Oilfield service companies expect solid U.S. onshore activity through 2014

Most major oilfield service companies expect U.S. onshore rig counts to be slightly up in 2014, compared to 2013, driven mostly by higher activity in the Permian Basin in West Texas. Both higher rig counts and increasing efficiencies to such higher levels of pad drilling (drilling more than one well on a single well site, which requires fewer rigs running to drill the same number of wells) and faster well drilling times are expected to drive the U.S. oil and gas production up significantly in 2014, compared to 2013.

Baker Hughes noted in its 1Q14 earnings call regarding the U.S. onshore market, “Our activity outlook for North America is relatively unchanged. During the first quarter the rig count increased 6% in the Permian. We expect continued rig count growth throughout the summer and fall leading to an increase of about 10% in this basin over the course of the year. This growth in the Permian is expected to contribute to a 4% increase in the overall U.S. rig count for the year with an average rig count of 1,830.”

Halliburton stated in its 1Q14 earnings call, “In the second quarter we’re expecting higher U.S. land activity… with the net result that we should see a low to mid-single-digit percentage improvement in North America revenue in the second quarter and margins will return to second half 2013 levels.” Schlumberger stated on its 1Q14 earnings call, “Now, in terms of activity outlook for North America, on land, we expect solid activity growth in U.S. land in 2014. We see this being led by South and West Texas. And in addition to the number of wells, we also see it supported by, again, efficiency gains and further uptake of new technology.”

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