Rig Count Up; End of the Decline?

Wow! The Baker Hughes U.S. drilling rig count released last Friday showed an increase in active rigs.  While active rigs increased by only four (one on land and three offshore in the Gulf of Mexico) the important thing is this was the first neutral to positive change in the rig count trend since last fall.  In fact, it has been 20 straight weeks of falling rigs until last week's rise.  Does the increase signal a reversal in trend?

When one looks at some of the internals of the rig count there are signs that drilling activity is responding to the recent changes in oil and gas prices.  For instance, there was an increase of seven rigs drilling for oil while two fewer drilling for natural gas and one less miscellaneous well.  Likewise, there were three less wells being drilled directionally and seven less horizontal, which were offset by 14 more rigs drilling vertical wells.  

What we know is that oil wells tend to be vertical so that accounts for half the increase in vertical rig activity.  Since crude oil prices have rallied 30 percent since the beginning of the year and are now over $50 a barrel, it is not surprising to see that oilwell drilling is starting to increase. 

On the other hand, natural gas prices continue to weaken, now having fallen to about $3.70 an Mcf, about a quarter of what gas prices were a year ago.  The root cause of the gas price weakness has been the growth in production from gas shales that are tapped with horizontal and/or directionally drilled wells.  Until gas prices fell to current low levels, producers were reluctant to cutback their drilling so there has been a lag in the slowdown in the drilling for these complex wells.  

Until natural gas prices begin to climb, it is likely that we will see more complex drilling cutback. If oil prices stay in the current range, we would expect more oil-focused drilling in future weeks and months.  The issue for the future of the overall rig count is which of these two contrary trends is stronger.  

We have made the case that this rig correction is more closely parelling the 1981-1986 pattern, albeit at a faster pace.  If this correction follows that earlier pattern, we have only about 128 rigs more to become idle.  We have already lost 947 rigs over the 20 weeks of consecutive decline.  We are 988 rigs below the absolute peak in the rig count last fall.

For many of the 20-week decline, we were losing 50-100 rigs each week.  We appear to be entering a new phase when actual declines will be more in the handful of rigs a week, with the potential for some weeks with rig count increases such as we just saw.  

Everytime there is a change in trend, we pause to assess its implications.  We are heartened that the rig count decline seems to be approaching an end.  It is probably not totally done, but the sharp weekly falls are over.  That has to be a good thing for the oilfield service industry.