U.S. Rig Count Heads Further Down - Analyst Blog
December 05 2011 - 8:30AM
Zacks
In its weekly release,
Houston-based oilfield services company Baker Hughes Inc.
(BHI) reported a dip in the U.S. rig
count (number of rigs searching for oil and gas in the country).
This can be primarily attributed to a decrease in the tally of land
rigs, partially offset by improved offshore rig count.
The Baker Hughes rig count, issued
since 1944, acts as an important yardstick for drilling contractors
such as Transocean Inc. (RIG),
Diamond Offshore (DO),
Noble Corp. (NE), Nabors
Industries (NBR), Patterson-UTI
Energy (PTEN) and Helmerich &
Payne (HP) in gauging the overall
business environment of the oil and gas industry.
Weekly
Summary
Rigs engaged in exploration and
production in the U.S. totaled 1,993 for the week ended December 2,
2011. This was down by 7 from the previous week’s rig count and
represents the fourth successive decline.
Despite this, the current
nationwide rig count is more than double that of the 6-year low of
876 (in the week ended June 12, 2009) and significantly exceeds the
prior-year level of 1,713. It rose to a 22-year high in 2008,
peaking at 2,031 in the weeks ending August 29 and September
12.
Rigs engaged in land operations
descended by 10 to 1,931, while offshore drilling was up by 3 to 42
rigs. Inland waters activity remained steady at 20 units.
Natural Gas Rig
Count
The natural gas rig count decreased
for the fifth week in a row to 856 (a drop of 9 rigs from the
previous week). As per the most recent report, the number of
gas-directed rigs is at their lowest level since January 22, 2010
and is down nearly 14% from its 2010 peak of 992, reached during
mid-August.
The current natural gas rig count
remains 47% below its all-time high of 1,606 reached in late summer
2008, but has rebounded strongly after bottoming out to a 7-year
low of 665 on July 17, 2009. In the year-ago period, there were 961
active natural gas rigs.
Oil Rig
Count
The oil rig count, which hit a
24-year high of 1,133 in November, was up by 2 to 1,132. The
current tally is way above the previous year’s rig count of 742. It
has recovered strongly from a low of 179 in June 2009, rising more
than 6 times.
Miscellaneous Rig
Count
The miscellaneous rig count
(primarily drilling for geothermal energy) at 5 remained unchanged
from the previous week.
Rig Count by
Type
The number of vertical drilling
rigs fell by 12 to 620, while the horizontal/directional rig count
(encompassing new drilling technology that has the ability to drill
and extract gas from dense rock formations, also known as shale
formations) was up by 5 at 1,373. In particular, horizontal rig
units rose by 1 from last week’s level to 1,156, just shy of the
all-time high of 1,157 reached in early this November.
Our
Take
As mentioned above, the natural gas
rig count has been falling since the last few weeks, 78 rigs in
fact (or 8.4%) from its recent high of 934 in October 28. Is this
bullish for natural gas fundamentals? The answer is a no, if we
look at the U.S. production and the shift in rig
composition.
With horizontal rig count – the
technology responsible for the abundant gas drilling in domestic
shale basins – close to its record high, output from these fields
remains robust. As a result, gas inventories still remain at
elevated levels – 7.3% above the 5-year average and 1.1% higher
than the same period last year.
In fact, natural gas prices have
dropped approximately 30% from this year’s peak of about $5.00 per
million Btu (MMBtu) in June to the current level of around $3.60
(referring to spot prices at the Henry Hub, the benchmark supply
point in Louisiana).
In the absence of major production
cuts or a stronger economy to boost industrial demand, which is
responsible for almost a third of gas consumption, we do not expect
much upside in gas prices in the near term. This has prompted some
companies to alter their spending patterns, away from gas to the
more profitable liquids-rich projects.
Therefore, we maintain our cautious
stance on natural gas-focused land drillers like Patterson-UTI
Energy, Nabors Industries and Helmerich & Payne. We expect
these stocks (all with Zacks #3 Ranks i.e. short-term Hold rating)
to remain under pressure, unless the outlook for natural gas prices
improves.
BAKER-HUGHES (BHI): Free Stock Analysis Report
DIAMOND OFFSHOR (DO): Free Stock Analysis Report
HELMERICH&PAYNE (HP): Free Stock Analysis Report
NABORS IND (NBR): Free Stock Analysis Report
NOBLE CORP (NE): Free Stock Analysis Report
PATTERSON-UTI (PTEN): Free Stock Analysis Report
TRANSOCEAN LTD (RIG): Free Stock Analysis Report
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