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US offshore rig count ‘steady as she goes’

Alex Chamberlin - Author
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Aug. 18 2020, Updated 4:45 a.m. ET

Offshore rig count

Last week, the offshore rig count remained unchanged at 54. The offshore rig count is now 12 rigs shy of the four-year high of 66, which was reached on August 29, 2014. In the last year, the offshore rig count fell by two. The current offshore rig count is strong compared to its mid-2010 low of ~12.

The offshore rig count can gauge the extent of energy exploration occurring and the activity levels of integrated companies. Chevron (CVX) and ExxonMobil (XOM) together account for 29.7% of the Energy Select Sector SPDR ETF (XLE). These energy companies operate in deepwater oilfields. They benefit from higher offshore oil and gas production.

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Why the offshore rigs count is strong

Offshore wells are more expensive, but have much longer production lives. This means production is steady and can last decades. They also have long lead times. So falling crude oil prices won’t affect production in the short run. Unlike onshore shale rigs, offshore rigs will respond slowly to a depressed crude oil price environment.

Gulf of Mexico

Rig counts in the Louisiana section of the Gulf of Mexico, or GOM, indicate offshore rig activity in the US. The area accounts for almost all offshore drilling in the country. The GOM rig count remained unchanged compared to the previous week. There were 53 rigs for the week ending January 23.

In 2010, the GOM rig count fell sharply after British Petroleum’s (BP) Deepwater Horizon oil spill. This led to restrictions being imposed by the US government. The GOM rig count didn’t recover to pre-accident levels for several years. By September 2012, it averaged ~50 rigs. It reached 63 in August. In 2014, the average rig count in the GOM was ~55.

Gulf of Mexico activity may face headwinds in 2015

Jack-up rigs are mobile offshore drilling units that perform drilling and work-over operations to lift or extract energy. According to industry news organization Rigzone, in 2015, jack-up rig utilization will fall below 50%, lower than the 30% drop that had been estimated earlier. This is mainly due to lower crude oil prices.

Lower offshore drilling activity also negatively affects companies like Baker Hughes (BHI) that service offshore drills. Baker Hughes accounts for 5.5% of the VanEck Vectors Oil Services ETF (OIH).

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