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Will the Falling Rig Count Benefit Coal Producers?

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Mar. 25 2015, Published 1:05 p.m. ET

Rig count

A drilling rig is a machine that’s used to dig a hole into the Earth’s surface. Rigs are used to drill oil and natural gas wells. Rigs can be set up onshore and offshore. Onshore rigs are usually moved once a well is drilled. Offshore rigs are more permanent. The higher the gas rig count, the higher the future natural gas production.

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Natural gas and oil rig count falls

The natural gas rig count dropped for the seventh straight week for the week ended March 20. According to Baker Hughes, an oilfield services company, the natural gas rig count fell to 242 on March 20 compared to 257 on March 13 and 326 a year back. The number of oil rigs that also produce some natural gas continued to fall. The oil rigs dropped below 1,000 at 825 on March 20. This was 41 fewer than the 866 on March 13.

What does this mean?

The natural gas rig count represents producers’ sentiments. If producers expect an increase in demand, the rig count will likely increase as producers drill more wells. The inverse is also true. An increasing natural gas rig count in a stable demand environment is a negative indicator for coal producers (KOL)—like Alpha Natural Resources (ANR), Cloud Peak Energy (CLD), and Arch Coal (ACI). However, a decrease in the rig count may not be positive for coal producers. The impact of utilities (XLU) depends on the revenue model and level of regulation. We’ll have a look at utilities and their revenue models in a separate series. While the natural gas rig count fell for the last three years, production is rising.

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