In its weekly release, Houston-based oilfield services company Baker Hughes Inc. (BHI) reported a massive fall in the U.S. rig count (number of rigs searching for oil and gas in the country).
This can be attributed to steep cutbacks in the tally of oil-directed rigs, which saw the significant drop. Talking numbers, the oil rig count dropped to the lowest level since Jan 2012, as crude prices hovered around $50 per barrel on plentiful supplies and lackluster demand expectations.
Analysis of the Data
Weekly Summary: Rigs engaged in exploration and production in the U.S. totaled 1,456 for the week ended Feb 6, 2015. This was down by 87 (approximately 5.6%) from the previous week’s rig count and indicates the lowest level in almost 5 years.
Following the latest decline, the current nationwide rig count is now well below the prior-year level of 1,771. It rose to a 22-year high in 2008, peaking at 2,031 in the weeks ending Aug 29 and Sep 12.
Rigs engaged in land operations – which fell by 85 to 1,397 – was the primary reason for the weekly rig-count plunge. Meanwhile, offshore drilling was up by 1 to 50 rigs, while inland waters activity decreased by 3 to 9 units.
Natural Gas Rig Count: The natural gas rig count decreased to 314 (a fall of 5 rigs from the previous week). The number of natural gas-directed rigs is down almost 61% from its recent peak of 811, achieved in 2012.
In fact, the current natural gas rig count remains 80% below its all-time high of 1,606 reached in late summer 2008. In the year-ago period, there were 351 active natural gas rigs.
Oil Rig Count: The oil rig count that rocketed to 1,609 in Oct 2014 – the highest since Baker Hughes started breaking up oil and natural gas rig counts in 1987 – dropped significantly (by 83) to 1,140. As a result of this drop, the current tally is now the lowest in 3 years and well below the previous year’s rig count of 1,416.
Miscellaneous Rig Count: The miscellaneous rig count (primarily drilling for geothermal energy) at 2 was up from the previous week’s count of 1.
Rig Count by Type: The number of vertical drilling rigs decreased by 2 to 233, 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 down by 85 to 1,223. In particular, horizontal rig units decreased by 80 from last week’s level to 1,088.
Gulf of Mexico (GoM): The GoM rig count was up by 1 to 48.
Conclusion
Key Barometer of Drilling Activity: The Baker Hughes data, issued since 1944, acts as an important yardstick for energy service providers in gauging the overall business environment of the oil and gas industry.
An increase or decrease in the Baker Hughes rotary rig count heavily weighs on the demand for energy services – drilling, completion, production, etc. – provided by companies that include large-cap names like Halliburton Co. (HAL) and Schlumberger Ltd. (SLB).
However, our preferred pick in this group is North American Energy Partners Inc. (NOA), which carries a Zacks Rank #1 (Strong Buy) and has a solid secular growth story with potential to rise significantly from the current level.
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