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US leads global growth in rig additions and production growth
From 2009 to 2013, the U.S. has continued to surpass the total international rigs combined by ~280 rigs, or 20%, on an average. The top companies that have gained from higher drilling activity in the U.S. have been Halliburton (HAL) and Schlumberger (SLB). These companies are components of the Market Vectors Oil Services ETF (OIH).
For most of the last two years, West Texas Intermediate (or WTI) crude oil has been range-bound between ~$85 per barrel and ~$110 per barrel. Higher crude prices generally have a positive effect on stocks in the energy sector.
The U.S. Energy Information Administration (or EIA)—in its Short-Term Energy Outlook released in August, 2014—reported that dry natural gas production is expected to total 69.6 billion cubic feet (or bcf) per day in 2Q14.
Natural gas rigs have decreased throughout 2014. At the beginning of the year, natural gas rigs totaled 372. The current natural gas rig count of 321 represents a drop of 51—or ~14%. Most of the decline in natural gas rigs came from the Eagle Ford at -20, Cana Woodford at -13, and Marcellus -13.
According to Baker Hughes, this week’s oil rig count was the highest since it started keeping records in 2005. It topped last week’s record. Since the beginning of 2014, oil rig counts have increased by 211—or ~15%.
The Permian Basin has the highest number of rigs in the U.S. Out of the 558 rigs in the Permian as of August 15, 2014, 57% are horizontal, 38% are vertical, and ~5% are directional. In contrast, as of August 19, 2011, only ~18% of the rigs were horizontal versus ~79% vertical rigs.
Year-to-date (or YTD), horizontal rigs are up by 16% at +181, while the vertical rigs were down by -9. According to Baker Hughes, a horizontal well is a type of directional well where the well surface location isn’t situated directly above the reservoir that it targets.
Year-to-date (or YTD), the onshore U.S. rig counts have increased by 171—or ~10%. Offshore rigs have increased by one—or ~2%. The onshore rig count can be a useful indicator to gauge the activity levels of land-based upstream energy companies such as Cabot Oil & Gas Corporation (COG) and Chesapeake Energy Corporation (CHK).
Year-to-date (or YTD), the total U.S. rig count has increased by 162—or 9%. Oil rigs have increased by 211—or 15%. Natural gas rigs have decreased by 51—or ~14%. Rig counts represent how many rigs are actively drilling for hydrocarbons—oil and gas.
Natural gas consumption is the highest in U.S. power plants. They account for almost 30% of the total demand. However, cooler-than-normal temperatures this year have led to reduced usage of air conditioners. This has reduced the demand for natural gas.
Injections of gas into storage have continued to surpass the five-year average for almost five months now. This indicates that inventories could be at comfortable levels before the winter season starts.
If the increase in natural gas inventories is greater-than-expected, it implies either greater supply or weaker demand and it’s bearish for natural gas prices. If the increase in natural gas inventories is less-than-expected, it implies either weaker supply or greater demand and it’s bullish for natural gas prices.
According to a government report, Chinese crude consumption is estimated to fall 2% compared to last year. Brent prices were also affected by this news. China is the world’s second largest oil consumer. A reduction in demand can put pressure on oil prices.
The decline was short-lived. The U.S. Energy Information Administration (or EIA) reported that petroleum-product stockpiles, especially distillates—including heating oil and diesel fuel—fell more than analysts expected. Crude prices increased $0.22 to settle at $97.59 a barrel on August 13. Crude prices were $97.37 the previous day.
New infrastructure has enabled increased movement of Cushing crude. The new infrastructure includes TransCanada’s Keystone Pipeline, Sunoco Logistics’ Permian Express Pipeline, Magellan Midstream Partners’ Longhorn Pipeline, and the Cushing’s Marketlink Pipeline.
According to the EIA, refineries cut their refinery inputs by 0.2 million barrels. They were operating at 91.6% capacity—0.8% lower than last week. Crude inventories are likely to increase in the coming months as refineries plan seasonal maintenance. This will reduce demand further.
As refineries enter into planned seasonal maintenance in the months ahead, crude inventories usually rise. This is because of the reduction in demand. Oil prices depend on inventory levels. However, they also rely on factors including the prices of refined petroleum products, macroeconomic factors, and international demand trends.
Among its peers in the upstream exploration and production space, ConocoPhillips (COP) is the largest player by sheer size when measured by enterprise value.
As noted above, both COP and XLE have had relatively high YTD returns compared to SPY. This is because energy stocks are rising at faster rate than the broad market.
Cash margins for the quarter were $31.78 per BOE—11% higher YOY but ~1% lower QOQ. The company noted that discontinued operations in Libya, and increased liquids production in the Lower 48 helped increase cash margins.