Why U.S. oil rig counts increased, but not gas rigs last week

Why should investors pay attention to oil and gas rig counts?

U.S. rig count trends show how much inclination companies have to spending 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 noted 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 Holding Company Depositary Receipts (or HOLDRs) ETF (OIH) and the Energy Select Sector SPDR (XLE).

Total rig count since 2005Enlarge Graph

U.S. rig counts increased last week and remained up 7% year-to-date 

The U.S. drilling rig count increased by nine, from 1,857 to 1,866, during the week ending May 30, according to the latest Baker Hughes report. The number of oil rig counts increased by eight and natural gas rig counts increased by one.Total rig count 1 yearEnlarge Graph

Year-to-date (or YTD), the total U.S. rig count has increased by 115, or 7%. Oil rigs have increased by 158 (11%), while natural gas rigs have declined by 46 (-12%). To learn more about oil and natural gas rig count trends, continue reading the next 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 increase slightly in 2014 compared to 2013, driven mostly by higher activity in the Permian Basin in west Texas. Both higher rig counts and increased efficiencies to 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 that the Permian activity drove the increase in 1Q14 rig counts. Continued rig count growth throughout the rest of the year would be supported by the Permian activity. BHI expects a 10% increase in rig counts in the Permian Basin over 2014, which is expected to contribute to a 4% overall increase in U.S. rig counts, resulting in a prediction of 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.”

Continue reading to the next part of this series to learn more about U.S. oil and natural gas rig counts.