Let’s first consider why investors should monitor rig counts. Well, rig counts tell you how many rigs are currently active for drilling. The rig count is an indicator of the oil and gas exploration industry’s health. As we saw previously in this series, the energy sector accounts for 10% of total steel consumption in the US. The steel products used by the energy industry are also called “oil country tubular goods” (or OCTGs).
U.S. Steel (X) is the biggest supplier of OCTG goods in North America. ArcelorMittal (MT) and Nucor (NUE) are also major suppliers to the energy industry. AK Steel (AKS) highlighted in its 4Q earnings call that it has minimal exposure to the energy industry.
Oil rigs have fallen sharply
The chart above shows the trend in oil-directed rigs in the United States. As you can see, oil rigs have fallen sharply. Currently, the active oil rig count stands at 1,140, down 30% from its peak in October 2014. The steep fall in crude oil prices is the primary reason behind falling oil rig counts.
Crude oil prices have recovered a bit from their recent lows, but oil rigs have continued their downward spiral. Please note that leading energy companies have reduced their capital expenditure targets for 2015. They’d like to wait for a sustained recovery in crude oil prices before committing more capital to their businesses.
Negative for the steel industry
Steel demand from the energy industry has been a key driver for U.S. Steel. As demand from the energy industry slows, U.S. Steel and other steelmakers with significant exposure to OCTG products will feel the heat in 2015. Currently, U.S. Steel forms 2.86% of the SPDR S&P Metals and Mining ETF (XME).
In the next part of this series, we’ll discuss how US steel production has shaped up so far in 2015.