Surprise oil rig count drop could reflect drilling efficiencies

Market Realist

U.S. 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)

Oil rig counts dropped but remain up on the year

The week of September 6, the Baker Hughes oil rig count decreased from 1,388 to 1,365. Despite the week’s drop, oil rig counts have largely been rising throughout 2013 and remain up ~4% throughout 2013. The medium-term increase in oil rigs drilling could signal that oil producers are feeling more positive about the current oil price environment, as they’re putting more capital to work to produce oil. WTI crude prices have remained elevated in the $105-to-$110-per-barrel range over the past few weeks, and they have remained at high levels throughout 2013, supporting a high oil rig count.

However, oilfield service companies aren’t overly bullish on U.S. rig counts for the rest of 2013

Most major oilfield service companies commented that they expect U.S. 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. Last week’s drop in rig counts 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 U.S. fracking market for more information. 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))

Despite the fact that many 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 well counts are still robust. The general consensus remains positive around the U.S. oil environment but lackluster around the U.S. gas environment.

Note that more U.S. oil drilling is generally positive for companies across the energy spectrum with U.S. 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: Why ethane stopped trading like crude and started trading like nat gas (part III))

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