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U.S. Rig Count Ticks Down as Natural Gas Drilling Drops

Zacks

In its weekly release, Houston-based oilfield services company Baker Hughes Inc. BHI reported a fall in the U.S. rig count (number of rigs searching for oil and gas in the country) – only the second decrease in 12 weeks.

This can be primarily attributed to losses in the tally of natural gas-directed rigs, partially offset by higher oil rig count.

Analysis of the Data

Weekly Summary: Rigs engaged in exploration and production in the U.S. totaled 506 for the week ended Sep 16, 2016. This was down by 2 from the previous week’s rig count and represents just the second time the tally did not rise since Jun. Rig counts have generally been increasing during the last three months since plunging to an all-time low of 404 in May, with the addition of a flood of new units.


Despite the steady climb – punctuated by a few pauses – the current nationwide rig count is considerably lower than the prior-year level of 842. It rose to a 22-year high in 2008, peaking at 2,031 in the weeks ending Aug 29 and Sep 12.

For the week in discussion, rigs engaged in land operations – which fell by 3 to 482 – were the primary reason for the decline in count. This was partly offset by higher offshore activity, where rig count was up by 2 to 20. Meanwhile, inland waters drilling was down by 1 to 4 units.

Oil Rig Count: The oil rig count – that bottomed at 316 in May 2016 – improved further (by 2) to 416. In fact, the number of active domestic oil rigs have gone up in eleven of the last 12 weeks. As a result of this sustained gain, the current tally is now the highest in 7 months. Nevertheless, they are well below the previous year’s rig count of 644 and only a fourth of the peak of 1,609 in Oct 2014.

Oils-Energy Sector Price Index

Oils-Energy Sector Price Index

Natural Gas Rig Count: The natural gas rig count – which last month plunged to their lowest level on record – decreased for the first time in 3 weeks to 89 (a dip of 3 rigs from the previous week). As per the most recent report, the number of natural gas-directed rigs are languishing 95% below the all-time high of 1,606 reached in late summer 2008. In the year-ago period, there were 198 active natural gas rigs.

Miscellaneous Rig Count: The miscellaneous rig count (primarily drilling for geothermal energy) at 1 was down from the previous week’s count of 2.

Rig Count by Type: The number of vertical drilling rigs remained unchanged at 64,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 by 2 to 442. In particular, horizontal rig units fell by 2 from last week’s multi-month high level to 394.

Gulf of Mexico (GoM): The GoM rig count was up by 2 to 20. The number of oil drilling rigs increased by 2 to 19, while there was a solitary gas rig exploring – same as last week.

Conclusion

Key Barometer of Drilling Activity: The Baker Hughes data, issued since 1944 at the end of every week, acts as an important yardstick for energy service providers in gauging the overall business environment of the oil and gas industry.

This generates considerable excitement among energy investors and has long been deployed to help predict future oil and gas production. When number of rigs decline, fewer wells are drilled. This means less new oil and gas are discovered, and ultimately production slows down.

As a result, 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 names like Halliburton Co. HAL, Schlumberger Ltd. SLB, Weatherford International plc WFT, Diamond Offshore Drilling Inc. DO, and Transocean Ltd. RIG.

All the companies mentioned above are Zacks #3 Rank (Hold) stocks, implying that these are expected to perform in line with the broader U.S. equity market over the next one to three months. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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