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Crude Oil and Natural Gas Rigs Diverge Further

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Crude oil and natural gas rigs

In the week ending July 10, the US rig count rose by five active crude oil rigs, which was partially offset by a fall of two natural gas rigs. This was the second week in a row that the crude oil rigs increased, while natural gas rigs decreased. Two miscellaneous rigs were also idled last week.

In the 12 months ending July 10, the total US crude oil and natural gas rig count fell by 1,012, or 54%. The number of active oil rigs fell by 918, or 59%. The number of natural gas rigs fell by 94, or ~30%, over this period.

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Why the rig count trend matters

Rig counts tell us how many rigs are actively drilling for oil and gas. Analyzing the change in the number of active rigs can help us understand how long-term supply could evolve. Oil and gas rig counts signal how confident producers are about drilling for oil and gas.

If the rig count continues to rise, this could indicate a potential rise in the production of oil and gas in the months to come. In contrast, falling rigs point to potential stagnation in supplies or even a fall in production.

Effect on energy companies

Higher crude oil and natural gas production will positively affect midstream energy MLPs (master limited partnerships) like Williams Partners (WPZ), Energy Transfer Partners (ETP), MarkWest Energy Partners (MWE), Enbridge Energy Partners (EEP), and EnLink Midstream Partners (ENLK).

The 54% fall in active rigs in the past year indicates a fall in exploration and production activity by upstream oil and gas companies. Apart from upstream and midstream energy companies, the falling natural gas rig count will also negatively impact natural gas compression services providers like Exterran Holdings (EXH) and Exterran Partners (EXLP). This trend will also negatively affect Dresser-Rand Group (DRC), which provides equipment for oil and gas transportation. Drill equipment makers like Core Laboratories NV (CLB) and C&J Energy Services (CJES) benefit if the crude oil rig count increases. Core Laboratories forms 2.6% of the VanEck Vectors Oil Services ETF (OIH).

A lower rig count should reduce oilfield service companies’ revenue, as upstream companies reduce exploration and production activity, and push OFS companies for lower contract terms or day rates to save on costs.

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