Must-know: Why investors should keep watching rig count figures

Part 3
Must-know: Why investors should keep watching rig count figures (Part 3 of 3)

Why oil rig counts keep rising from additions in Granite Wash

Oil rig count continued to increase last week

Last week, the Baker Hughes oil rig count increased to 1,558 from 1,545, driven by an increase of ten rigs in the other areas outside of the major classified plays and by four rigs in Granite Wash. Since the beginning of 2014, oil rig counts have increased by ~13% (+180). Much of the increase in rig counts has been driven by activity in the oil-rich Permian Basin in west Texas (+89). Out of the current 1,558 oil rigs at work, the majority are either in the Permian (548), the Eagle Ford (209), the Williston and Bakken (178), or the Mississippian (73).

Oil Rig Jun-1 to Jun-14Enlarge Graph

Oil rig counts can indicate how producers such as ExxonMobil (XOM), Pioneer Natural Resources (PXD), Oasis Petroleum (OAS), and EOG Resources (EOG) feel about the drilling and price environment. These companies also comprise exchange-traded funds (or ETFs) such as the Energy Select SPDR ETF (XLE). Although oil prices have declined somewhat since reaching ~$110 per barrel in early September (using West Texas Intermediate (or WTI) crude oil prices), they’ve stayed above the $90-per-barrel level for most of 2013 and into 2014, which generally supports oil drilling and, consequently, a high oil rig count.

Background: The U.S. rig counts increased rapidly following the recession

When the worst of the recession hit, U.S. oil rig counts fell from over 400 to nearly 175. Since bottoming around mid-2009, two major trends caused oil rig counts to rebound rapidly. First, when oil prices sank to below $40 per barrel in early 2009, no one was looking to drill for oil because it was unprofitable. Frozen capital markets made raising money to fund capex programs expensive. In 3Q09, oil prices recovered to roughly $70 per barrel. Raising money in the capital markets was starting to become easier. Second, during that period, companies were beginning to drill basins that became attractive with the help of new technology—notably shale basins. From mid-2009 to now, more oil rigs began working in places like the Bakken Shale in North Dakota, the Eagle Ford Shale in south Texas, and the Permian Basin in west Texas, where previous drilling activity had either stagnated or been minimal.

Oil Rigs Jan-06 to Jan-14Enlarge Graph

Oil rig counts decreased somewhat in mid-2012, a period characterized by some volatility in oil markets, with WTI crude oil prices dropping from over $100 per barrel and recovering to $99.46 per barrel. Oil prices have since recovered, and so have oil rig counts. Oil prices remained relatively buoyant over 2013, and most analysts expect price levels to remain economic enough to drill in the major U.S. oil shale plays (the Bakken, Eagle Ford, and the Permian). As upstream companies have disclosed capital expenditure plans for 2014, it seems that oil drilling activity in the U.S. will remain very active. If oil prices remain relatively high and stable, oil rig counts are likely to remain near current levels or continue to increase.

To learn more about important releases that affect energy stocks and ETFs, go to Market Realist’s Energy and Power page.

The Realist Discussions