Why oil rig counts continue to rise—Granite Wash and Eagle Ford



Oil rig counts continued to rise last week

Last week, the Baker Hughes oil rig count increased marginally to 1,563 from 1,562, driven by an increase of five rigs in Granite Wash and four rigs in Eagle Ford.


Oil Rig Jul-13 to Jul-14

Since the beginning of 2014, oil rig counts have increased by ~13%, +185. Much of the increase in rig counts has been driven by activity in the oil-rich Permian Basin in west Texas at +98. Out of the current 1,563 oil rigs at work, the majority are either in the Permian  at 557, the Eagle Ford at 210, the Williston and Bakken at 179, or the Mississippian at 77.

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Oil rig counts can indicate how producers such as ExxonMobil (XOM), Pioneer Natural Resources (PXD), Oasis Petroleum (OAS), and EOG Resources (EOG) feel about the drilling and price environment. These companies also comprise exchange-traded funds (or ETFs) such as the Energy Select SPDR ETF (XLE). West Texas Intermediate (or WTI) oil prices have increased somewhat since reaching ~$95 per barrel in early January. They’ve stayed above the $100-per-barrel level since May, which generally supports oil drilling and, consequently, a high oil rig count.

U.S. rig counts increased rapidly following the recession

When the worst of the recession hit, U.S. oil rig counts fell from over 400 to nearly 175. Since bottoming around mid-2009, two major trends caused oil rig counts to rebound rapidly. First, when oil prices sank to below $40 per barrel in early 2009, no one was looking to drill for oil because it was unprofitable.

Frozen capital markets made raising money to fund capex programs expensive. In 3Q09, oil prices recovered to roughly $70 per barrel. Raising money in the capital markets was starting to become easier. Second, during that period, companies were beginning to drill basins that became attractive with the help of new technology—notably shale basins. From mid-2009 to now, more oil rigs began working in places like the Bakken Shale in North Dakota, the Eagle Ford Shale in south Texas, and the Permian Basin in west Texas, where previous drilling activity had either stagnated or been minimal.Oil Rig Jan-06 to Jan-14

Oil rig counts decreased somewhat in mid-2012, a period characterized by some volatility in oil markets, with WTI crude oil prices dropping from over $100 per barrel and recovering to $99.46 per barrel. Oil prices have since recovered, and so have oil rig counts. Oil prices remained relatively buoyant over 2013, and most analysts expect price levels to remain economic enough to drill in the major U.S. oil shale plays—the Bakken, Eagle Ford, and the Permian.

As upstream companies have disclosed capital expenditure plans for 2014, it seems that oil drilling activity in the U.S. will remain very active. If oil prices remain relatively high and stable, oil rig counts are likely to remain near current levels or continue to increase.

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