Oil rig counts dropped last week, after seven weeks of increases

Market Realist

What rig counts signal about drilling sentiment (Part 2 of 3)

(Continued from Part 1)

Oil rig counts decreased last week but have been up significantly since late October

Last week, the Baker Hughes oil rig count decreased from 1,411 to 1,395. Prior to this week, oil rig counts had climbed for seven weeks straight. Oil rig counts were at 1,357 on October 25 and had reached 1,411 on December 13. The increase in oil rigs had been driven by higher rig counts in the Permian Basin in West Texas and the Eagle Ford in South Texas. Oil rig counts can indicate how producers such as ExxonMobil (XOM), Pioneer Natural Resources (PXD), Oasis Petroleum (OAS), and Chesapeake Energy (CHK) feel about the drilling and price environment. These companies also are part of ETFs such as the Energy Select SPDR ETF (XLE).

Though oil prices have declined in recent months, they’ve stayed above the $90-per-barrel level for most of 2013, which generally supports oil drilling and consequently a high oil rig count. For more on crude oil prices, see WTI crude oil prices drifted down to their lowest point since June.

Baker Hughes noted on its 3Q13 earnings call that it anticipated 4Q13 U.S. oil rig counts to average 1,320, compared to 3Q13 levels of ~1,380. The company noted that the sequential decline was expected mostly due to seasonality heading into the winter and holidays. However, it’s likely that the average will be above 1,320, as quarter-to-date, the average is near 1,380. This means that the level of oil drilling activity exceeded Baker Hughes’ expectations.

Background: U.S. rig counts increased rapidly since the recession, but have since flatlined

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. Firstly, when oil prices sank to below $40 per barrel in early 2009, no one was looking to drill for oil—both because it was unprofitable and because frozen capital markets made raising money to fund capex programs are expensive. In 3Q09, oil prices recovered to roughly $70 per barrel. Raising money in the capital markets was starting to become easier. Secondly, 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 and 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 counts dipped somewhat in mid-2012, as that period was characterized by some volatility in oil markets, with WTI crude oil prices dropping from over $100 per barrel to under $80 per barrel. Oil prices since recovered, and so have oil rig counts. Note that oil prices have remained relatively buoyant over 2013, and most analysts expect oil prices to remain economic enough to drill in the major U.S. oil shale plays (the Bakken, Eagle Ford, and Permian). As companies have begun to disclose their capital expenditure plans for 2014, it seems that oil drilling activity in the U.S. will remain very active.

Continue to Part 3

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