How Does the US Rig Count Affect the OFS Industry?



US rig count in perspective

We discussed US crude oil production and crude oil prices in the previous article. Now, let’s discuss the US rig count and how it affects the oilfield equipment and services (or OFS) industry. In September 2008, the overall US rig count hit 2,031, its highest level since July 1987, according to Baker Hughes (BHI).

In September 2014, the average rig count came close to that record, reaching 1,931. From September 2014 to May 2016, ~79% of rigs were idled. As crude oil has since shown signs of recovery, the rig count has responded with gains accordingly. From May to November 11, 2016, the US rig count rose 41%.

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The fraclog factor and its effects

The number of US rigs has fallen sharply since the crude oil price crash in September 2014. However, the US crude oil production has been relatively resilient due to the presence of drilled but uncompleted wells. Production from these wells, also known as fraclogs, partially offset the fall in production due to the falling rate of wells and lower drilling activity, even as legacy rigs are retired.

Rig count falls exposed the OFS industry to an oversupplied and competitive environment, significantly lowering OFS companies’ margins as their bargaining power withered. The VanEck Vectors Oil Services ETF (OIH), an ETF tracking an index of 25 OFS companies, has fallen 33% since September 2014.

What’s ahead for the OFS industry?

The US rig count has started to rise again in the past five months. A meaningful recovery in crude oil production and, thus, in OFS companies’ fortunes, could happen if energy prices sustain above a level where production in conventional fields and unconventional shales is profitable.

However, a recovery in production could keep a lid on crude oil prices and extend the period of subdued drilling activity. A recovery in production could also prolong the pain for OFS companies such as RPC (RES), Flotek Industries (FTK), and Weatherford International (WFT). Weatherford International makes up 0.19% of the ProShares Ultra Oil & Gas ETF (DIG).

Next, we’ll discuss whether the OFS industry has been moving away from the United States as crude oil prices have weakened.


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