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Falling Rig Count Isn’t Helping Coal Producers

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Rig count

A drilling rig is a machine used to dig a hole into the surface of the earth. Rigs are used to drill oil and natural gas wells. Rigs can be set up onshore and offshore. The 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

Natural gas rig count dropped for the eighth straight week in the week ending March 27. According to Baker Hughes, an oilfield services company, natural gas rig count fell to 233 on March 27 compared to 242 on March 20 and 318 a year back.

The number of oil rigs that also produce some natural gas continued to fall. These oil rigs dropped to 813 on March 27. This was 12 less than the 825 on March 20.

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) such as Alpha Natural Resources (ANR), Cloud Peak Energy (CLD), and Arch Coal (ACI). However, a decrease in rig count may not be positive for coal producers.

The impact on 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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