U.S. Rig Count Hits 14-Month High - 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 intensified drilling activity by the producers.

Rigs exploring and producing in the U.S. totaled 1,465 for the week ended Apr. 1, 2010 (as can be seen in the first chart below, from Baker Hughes). This is up by 21 from the previous week’s tally and represents the highest level since the week ended Jan. 30, 2009. The current nationwide rig count is 67% higher from the 2009 low of 876 (set in the week ended June 12) and significantly exceeds the prior-year level of 1,043. It rose to a 22-year high in 2008, peaking at 2,031 in the weeks ended Aug. 29 and Sept. 12.

The natural gas rig count increased for the 14th straight week to reach 949 (a gain of 8 from the previous week), hitting a fresh 13-month high. The U.S. gas drilling rig count has rebounded strongly after bottoming to a 7-year low of 665 on July 17, 2009. Still, the rig count remains 41% lower than its peak of 1,606 in late summer 2008. In the year-ago period, there were 808 active natural gas rigs. This is shown in the following chart, also from Baker Hughes.

The oil rig count was up by 13 to 502, the fourth consecutive weekly rise. The current tally is considerably higher than the previous year’s count of 224, as shown in the following chart from Baker Hughes. It has recovered nicely from a low of 179 in June 2009 and is now at the highest level in 18 years. 

The miscellaneous rig count, at 14, remains unchanged from the previous week.

Producers had scaled back oil and gas drilling operations over the past year (leading to a drastic reduction in rig count) in the midst of falling commodity prices and tighter access to credit. However, during recent months, companies started to bring rigs back on line amid signs of economic stabilization that could drive up energy demand.

Amid this growing optimism and expectations of faster-than-expected economic recovery, oil prices recently hit an 18-month high, climbing towards $86 per barrel. This pushed the nationwide rig count above 1,400 working units for the week ended Mar. 12, 2010, for the first time in more than a year.

The overall picture, though, remains weak, particularly for natural gas. The specter of a continued glut in domestic gas supplies still exists, with storage levels remaining 11% above their five-year average. Following the end of the three-month cold snap (from Dec. ‘09 through Feb. ’10) and the arrival of mild spring weather, there has been a significant reduction in space-heating demand.

Further pressurizing the commodity is the rapid rise in the number of drilling rigs working in the U.S. (natural gas rig count has climbed 43% from a seven-year low reached last July) that signals a supply glut later this year in the face of sluggish industrial demand. Meanwhile, production from dense rock formations (shale) remains robust.

There are concerns among traders that the market will be oversupplied in the short-to-medium term, with rig counts going up and industrial demand still struggling due to the weak economy.

On the whole, we believe that natural gas fundamentals remain bearish, while the outlook for oil drilling is comparatively robust. Taking these contradictory views into consideration, we look to maintain our cautious outlook on diversified service firms like Halliburton Company (HAL), Schlumberger Limited (SLB), National-Oilwell Varco (NOV) and Baker Hughes.

Land drillers such as Nabors Industries (NBR) and Patterson-UTI Energy (PTEN) are also expected to remain under pressure. Although we expect the land rig count to continue with its steady rise during 2010, the large amount of excess capacity in the sector will weigh on dayrates and margins well into the year.

All the above-mentioned companies currently have Zacks #3 Ranks (Hold), meaning that these stocks are expected to perform relatively the same as the overall market during the next 1-3 months. Therefore, investors should maintain their current positions in the stocks over this time period.
Read the full analyst report on "BHI"
Read the full analyst report on "HAL"
Read the full analyst report on "SLB"
Read the full analyst report on "NOV"
Read the full analyst report on "NBR"
Read the full analyst report on "PTEN"
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