In its weekly release, Houston-based oilfield services company Baker Hughes (NYSE:BHI) reported a plunge 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. In particular, oil rig count dropped to the lowest level since June, as crude prices remained below $60 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 1,893 for the week ended Dec 12, 2014. This was down by 27 from the previous week’s rig count and indicates the second decrease in 3 weeks.
Despite this, 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 well above the prior-year level of 1,782. 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 fell by 28 to 1,820, offshore drilling was up by 2 to 60 rigs, while inland waters activity decreased by 1 to 13 units.
Natural Gas Rig Count: The natural gas rig count – which in November reached a ten-month high – increased for the first time in 3 weeks to 346 (a gain of 2 rigs from the previous week). Despite the weekly growth, the number of natural gas-directed rigs is down 57% from its recent peak of 811, achieved in 2012.
In fact, the current natural gas rig count remains 78% below its all-time high of 1,606 reached in late summer 2008. In the year-ago period, there were 369 active natural gas rigs.
Oil Rig Count: The oil rig count that rocketed to 1,609 in Oct, the highest since Baker Hughes started breaking up oil and natural gas rig counts in 1987, crashed by 29 to 1,546. Nevertheless, the current tally is way above the previous year’s rig count of 1,411 and has recovered strongly from a low of 179 in June 2009, rising almost 9-fold.
Miscellaneous Rig Count: The miscellaneous rig count (primarily drilling for geothermal energy) at 1 remained unchanged from the previous week.
Rig Count by Type: The number of vertical drilling rigs decreased by 24 to 330, 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 3 to 1,563. In particular, horizontal rig units decreased by 1 from last week’s level to 1,367.
Gulf of Mexico (GoM): The GoM rig count was up by 2 to 58. Both oil and gas drilling went up by a unit each to 42 and 16 rigs, respectively.
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 Company (NYSE:HAL) and Schlumberger NV (NYSE:SLB).
However, our preferred pick in this group is Transocean Ltd (SIX:RIGN). The UK-based firm – carrying a Zacks Rank #2 (Buy) – has a solid secular growth story with potential to rise from the current level.