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Why the energy industry and investors pay attention to rig counts

Ingrid Pan, CFA

Why oil rigs rose while natural gas rigs fell in 2013 (Part 1 of 3)

U.S. 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 (oil and gas). 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 feel about the drilling environment. As rig counts show one measure of oil and gas drilling activity, the figure can also be a useful indicator to gauge the activity levels of oilfield service companies such as Baker Hughes (BHI), Halliburton (HAL), Schlumberger (SLB), and Weatherford (WFT)—all of which are part of the Oil Services HOLDRs ETF (OIH).


Why oilfield service companies weren’t bullish on U.S. rig counts for the end of 2013

Most major oilfield service companies had commented that they expect U.S. rig counts (including both oil and gas) to be flat-to-down through 4Q13. 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. Part of the reason they expected fewer rigs is because producers have been able to realize other efficiencies from having gained experience in the relatively new shale plays they’ve started to drill over the past few years. The efficiencies have allowed for less money spent on oilfield services (including drilling) to realize the same amount of production.

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 background. In recognition of this need, as a service, Baker Hughes has begun to report well counts alongside rig counts. Plus, service companies expected normal seasonality heading into 4Q13, which is likely to negatively impact U.S. rig counts. This also doesn’t imply negative sentiment but is a regular annual slowdown due to the holidays.

U.S. rig counts were down slightly last week, but activity has remained stable

U.S. rig counts totaled 1,751 on January 3, 2014, compared to 1,757 the week prior. Over the medium term, rig counts have been relatively stable over the past year, with total counts between 1,740 and 1,780 even into 4Q13, when activity usually slows down due to seasonality. Over the course of 2013, U.S. rig counts were only very slightly changed, as rig counts totaled 1,751 on January 3, 2014, compared to 1,762 on January 4, 2013.

Note that Baker Hughes usually states its expectations of U.S. drilling activity every quarter on its earnings calls. On its 3Q13 earnings call, the company forecasted 4Q13 rig counts of 1,660, and 4Q13 actual rig counts averaged nearly 1,760. The higher-than-expected rig counts were one signal that producers were eager to continue spending money drilling wells and felt generally positive about the drilling environment. Baker Hughes’ next earnings call is scheduled for January 21, 2014, at which point the company will likely give its outlook on 1Q14 drilling activity.

For further discussion of the trends in both natural gas rig counts and oil rig counts, please read the following parts in this series.

Continue to Part 2

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