Why did 4Q13 oil rig counts surpass analysts’ expectations?

Market Realist

Why rig counts in 4Q13 averaged higher than forecast (Part 2 of 3)

(Continued from Part 1)

Oil rig counts slid last week, but 4Q13 average rig counts are above Baker Hughes’s forecasts

Last week, the Baker Hughes oil rig count decreased from 1,395 to 1,382, with most of the decrease coming from a falloff in Permian rigs. For 4Q13, oil rig counts averaged ~1,380, compared to Baker Hughes’s 4Q13 forecast of 1,320 and 3Q13 average rig counts of ~1,380. The company had expected a decrease in rigs due to normal year-end seasonality and, to some extent, due to efficiencies (producers learning how to use fewer rigs to produce more oil).

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 comprise ETFs such as the Energy Select SPDR ETF (XLE).

Though oil prices have declined somewhat since reaching ~$110 per barrel in early September (using WTI crude oil prices), 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 Energy outlook: Why crude oil prices moved up this week.

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 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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