Oil Rig Count Tops 1500 - Analyst Blog

In its weekly release, Houston-based oilfield services company Baker Hughes Inc. BHI reported a rise in the U.S. rig count (number of rigs searching for oil and gas in the country).

This can be attributed to an increase in the tally of oil-directed rigs, which jumped to a new 27-year high level. On the other hand, the natural gas rig count dropped to a 21-year low.

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.

Analysis of the Data

Weekly Summary: Rigs engaged in exploration and production in the U.S. totaled 1,831 for the week ended Apr 11, 2014. This was up by 13 from the previous week's rig count and indicates the third increase in as many weeks.

The current nationwide rig count is more than double the lowest level reached in recent years (876 in the week ended Jun 12, 2009) and is above 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 ascended by 5 to 1,759, offshore drilling was up by 6 to 53 rigs, while inland waters activity increased by 2 to 19 units.

Natural Gas Rig Count: Natural gas rig count decreased for the fifth successive week to 310 (a drop of 6 rigs from the previous week). As per the most recent report, the number of natural gas-directed rigs is at their lowest level since May 21, 1993 and is down 62% from its recent peak of 811, achieved in 2012.

In fact, the current natural gas rig count remains 81% below its all-time high of 1,606 reached in late summer 2008. In the year-ago period, there were 377 active natural gas rigs.

Oil Rig Count: The oil rig count was up by 19 to 1,517. The current tally – the highest since Baker Hughes started breaking up oil and natural gas rig counts in 1987 – is way above the previous year's rig count of 1,387. It has recovered strongly from a low of 179 in June 2009, rising 8.5 times.

Miscellaneous Rig Count: The miscellaneous rig count (primarily drilling for geothermal energy) at 4 remained unchanged from the previous week.

Rig Count by Type: The number of vertical drilling rigs fell by 2 to 391, 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 15 to 1,440. In particular, horizontal rig units remained flat at the all-time high of 1,224.

Gulf of Mexico (GoM): The GoM rig count was up by 6 to 52. Oil drilling improved by 4 units to 41 rigs, while gas rigs increased from their week-ago level by 2 to 11.

Conclusion

A Key Barometer of Drilling Activity: 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 Unit Corp. UNT. The Tulsa, Oklahoma-based firm – sporting a Zacks Rank #1 (Strong Buy) – has a solid secular growth story with potential to rise significantly from the current level.