U.S. Rig Count Recovery Continues - 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), reflecting an increase in the land rig count.
 
Rigs exploration and production in the U.S. totaled 1,661 for the week ended September 17, 2010. This is up by 7 from the previous week's rig count and represents the highest level achieved this year. The current nation-wide rig count is 90% higher from the 2009 low of 876 (set in the week ended June 12, 2009) and significantly exceeds the prior-year level of 1,010. It rose to a 22-year high in 2008, peaking to 2,031 in the weeks ending August 29 and September 12.
 
Rigs engaged in land operations climbed by 6 to 1,626, inland waters activity increased by 1 to 14, while offshore drilling remained steady at 21 rigs.
 
Natural Gas Rig Count
 
The natural gas rig count increased for the third time in many weeks to 982 (a gain of 2 from the previous week). In August, the number of gas-directed rigs hit 992, an 18-month high. The U.S. gas drilling rig count has rebounded strongly after bottoming out to a 7-year low of 665 on July 17, 2009. Still, the rig count remains 39%, lower than its peak of 1,606 in late summer 2008. In the year-ago period, there were 705 active natural gas rigs.
 
Oil Rig Count
 
The oil rig count was up by 7 to 670, the seventh gain in the last 9 weeks. The current tally is considerably higher than the previous year's rig count of 293. It has recovered nicely from a low of 179 in June 2009, nearly quadrupling in number.
 
Miscellaneous Rig Count
 
The miscellaneous rig count (primarily drilling for geothermal energy) at 9, was down 2 from the previous week.
 
Rig Count by Type
 
The number of vertical drilling rigs was up 15 to 527. On the other hand, 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) fell by 8 to 1,134.
 
Conclusion
 
Despite robust gains in the rig count during the first half of 2010, land drilling stocks continue to be dictated by natural gas prices, which remain weak on the back of supply overhang. Going by the consensus view, domestic land rig activity is expected to consolidate/come down from current levels of around 1600 rigs, with a shift from gas to liquids rich plays.
 
Among the onshore contract drillers, we are positive on Patterson-UTI Energy (PTEN). The Texas-based company, which had heavy spot market exposure, was hit badly by the financial crisis with operators tending to release land rigs to preserve cash. However, Patterson-UTI has recovered almost all its lost market share and currently retains a Zacks #1 Rank (short-term Strong Buy rating).
 
We continue to be skeptical on offshore drillers, given the fallout from the Macondo incident and the high number of rigs available to the market. We take a bearish stance on Transocean Inc (RIG), Diamond Offshore (DO), and Pride International (PDE). We have a Zacks Rank of #4 (short-term Sell recommendation) on these shares. 

 
BAKER-HUGHES (BHI): Free Stock Analysis Report
 
DIAMOND OFFSHOR (DO): Free Stock Analysis Report
 
PRIDE INTL INC (PDE): Free Stock Analysis Report
 
PATTERSON-UTI (PTEN): Free Stock Analysis Report
 
TRANSOCEAN LTD (RIG): Free Stock Analysis Report
 
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