Oil rig count drop could signal efficiencies rather than sentiment

Market Realist

US oil rig count trends depend on how much companies are willing and able to spend on drilling

Rig counts represent how many rigs are actively drilling for hydrocarbons. Baker Hughes, an oilfield services company, reports rig counts weekly. The company notes that rig count trends are “governed by oil company exploration and development spending, which is influenced by the current and expected price of oil and natural gas.” So rig counts can represent how confident oil and gas producers such as ExxonMobil (XOM), ConocoPhillips (COP), Hess Corp. (HES), and Chevron (CVX) feel about the environment, as more rigs working means more spending.

(Read more: Introduction [PART 1])

Oil rig counts increased last week, but they’re down ~3% since June

Last week, the Baker Hughes oil rig count increased from 1,362 to 1,372. Despite last week’s increase, oil rig counts have been on a slight downward trend since mid-year. Oil rig counts peaked this year in June at 1,413, but have since fallen about 3%. Though the drop could signal that oil producers are feeling less sanguine about the oil price and drilling environment, as less capital is being put to work to produce oil, the drop may be due to increased efficiencies in drilling.

Recent prices have actually supported oil drilling, as WTI crude has remained elevated in the $100-to-$110-per-barrel range over the past few months and has remained at high levels throughout 2013. This has supported a high oil rig count.

Oilfield service companies aren’t overly bullish on US rig counts for the rest of 2013

Most major oilfield service companies commented that they expect US rig counts (including both oil and gas) to remain flattish for the balance of the year. Companies such as Halliburton (HAL) noted that the driver of this trend is a switch to pad drilling (drilling more than one well on a single well site), which requires fewer rigs running to drill the same number of wells. However, this doesn’t translate into weak activity or a negative signal necessarily. The decline in rig counts over the past few months may reflect the move towards more pad drilling and rig efficiency.

Halliburton noted, “In spite of a relatively flat sequential U.S. rig count, drilling efficiencies in the trend towards multi-well pads are driving a more robust well count.” Producers are still eager to drill wells, and even if rig counts are flat, other services such as well completion are still needed, providing revenue to oilfield service names in the situation of higher well counts. See Higher well count and stage count helping US fracking market for more background. In recognition of this need, as a service, Baker Hughes has begun to report well counts alongside rig counts

(Read more: Why ethane stopped trading like crude and started trading like nat gas (part II))

Although many analysts see overall rig counts (oil and gas) to be flat for the balance of 2013, companies have commented that this is due to efficiencies and continually robust well counts. The general consensus remains positive around the US oil environment, but lackluster around the US gas environment.

Note that more US oil drilling is generally positive for companies across the energy spectrum with US assets from producers (such as XOM, COP, HES, and CVX, as we’ve seen) to midstream companies to service companies—many of which are in the Energy Select Sector SPDR ETF (XLE).

(Read more: Natural gas continues to lose market share to coal year-over-year due to price gains)

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