Land-based rig count down
During the week ending February 6, 2015, the US land-based, or onshore, rig count fell by 88 compared to the previous week’s count. There were 1,406 land-based rigs, including nine inland water rigs. The inland water rig count decreased by three from the previous week. The onshore US rig count is at its lowest since April 2010.
Last week was the 11th straight week that the onshore rig count declined. Texas alone lost 41 rigs. The onshore rig count reached 1,876 in the week ending November 21, 2014. That was the highest it has been since July 2012. A total of 470 onshore rigs have gone off-line since November 21, representing a decline of ~25%.
The onshore US rig count started to look weak after hitting its highest levels since August 2012. The count reached the same landmark three times in three months. But the onshore rig count had been on an uptick since the beginning of 2014. Then, falling crude oil prices started to affect that trend. In response, the onshore rig count seems to have taken a U-turn from the uptrend.
In the last year, the land-based US rig count has fallen by 311. In contrast, the number of offshore rigs decreased by four. The number of land-based rigs declined mostly in Texas, where 189 rigs shut down. North Dakota lost 36 gas-targeted rigs last year.
Why did the onshore rig count fall?
Falling crude oil prices have affected US onshore rigs most. Some of the unconventional resource shales have higher exploration and production costs because of their geology. Production techniques such as hydraulic fracturing are also costlier. Upstream companies operating at these marginal economic plays shut down or suspend production if they are unable to produce at a break-even cost.
In October, Tudor, Pickering, Holt & Co., an independent research firm that tracks the US energy sector, estimated that 160 horizontal and 30 vertical rigs were rigs at risk. West Texas Intermediate (or WTI) crude oil prices have decreased ~38% since then.
Texas expected to lose more rigs
Economist Karr Ingham of the Ingham Economic Reporting, an economic analysis and research firm, expects that two-thirds of the Texas rigs at work will be laid down. That’s approximately 600 rigs down, if the price of crude oil stays low and demand weakens.
Most prolific states
Despite the recent decrease, Texas still has the most land-based rigs in the Unites States. It has 654, or 47%, of the total US land-based rigs. Oklahoma follows Texas with 176 land-based rigs. North Dakota has 132 land-based rigs.
Some of the largest oilfield service companies are based in Texas, including Baker Hughes (BHI), Halliburton Company (HAL), Cameron International (CAM), and Weatherford International (WFT). Combined, these companies form 26.7% of the VanEck Vectors Oil Services ETF (OIH).
The Gulf of Mexico is the main offshore rig indicator. We’ll discuss why in the next part of this series.