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What’s Driving the Weakness in US Rig Counts?

PART:
1 2 3 4 5 6 7 8 9 10
Part 9
What’s Driving the Weakness in US Rig Counts? PART 9 OF 10

US Offshore Rig Count Down 55% in the Last Year

US offshore rig count

In the week ended August 28, 2015, the US offshore rig count fell by two compared to the previous week to 30 rigs. Offshore rig counts have averaged 33 over the past eight weeks. The offshore rig count is nearly 55% off its four-year high of 66 in August 2014.

With last week’s fall, the US offshore rig count has now decreased for three consecutive weeks.

US Offshore Rig Count Down 55% in the Last Year

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Offshore wells are more expensive than onshore wells, but they have much longer production lives. Offshore projects also have long lead times. Falling crude oil prices don’t affect planned offshore projects in the short term.

The Louisiana section of the Gulf of Mexico accounts for almost all of the US offshore drilling. According to the EIA (U.S. Energy Information Administration), 13 projects are expected to start in the Gulf of Mexico in the next two years: eight in 2015 and five in 2016.

Rig utilization

According to the industry news organization Rigzone, the utilization of jack-up rigs stood at 61% on August 28, 2015. In comparison, utilization was ~79% a year ago. Offshore rig counts indicate how busy rig operators like Transocean (RIG) and Ensco (ESV) are at any given time. Offshore rig counts can also determine the activity levels of subsea oilfield service equipment and technology providers like Cameron International (CAM) and FMC Technologies (FTI). Rig counts also help investors foresee revenue trends for offshore rig equipment manufacturers like Oil States International (OIS). Ensco accounts for 3.46% of the VanEck Vectors Oil Services ETF (OIH).

Jack-up rigs are mobile offshore drilling units that perform drilling and workover operations to lift energy. Rigzone estimates that the use of jack-up rigs will likely fall below 50% in 2015 due to lower crude oil prices.

Trends in the offshore rig count also indicate offshore energy activity by upstream and integrated energy companies. ExxonMobil (XOM) and Royal Dutch Shell (RDS.A) have offshore operations.

Led by a weakening rig count in the Gulf of Mexico, production levels may go lower, which can negatively affect midstream MLPs like Energy Products Partners (EPD), Shell Midstream Partners (SHLX), and MarkWest Energy Partners (MWE), which operate in the Gulf of Mexico region.

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