The US added 12 oil-directed drilling rigs last week, breaking a string of consistent and sometimes precipitous declines that stretched back to the seven days ended Oct. 10, 2014.
A handful of publicly traded oil and gas producers have announced plans to add drilling rigs in recent weeks:
Citing RigData, Bloomberg has also reported several rig additions by large-cap players. Exxon Mobil Corp (NYSE: XOM), for example, put a total of four rigs to work in the week ended June 26, adding drilling units in the Bakken Shale, Utica Shale, Marcellus Shale and the Permian Basin.
During the previous week, Anadarko Petroleum Corp (NYSE: APC) added a rig in the Denver-Julesburg Basin and the Eagle Ford Shale, while ConocoPhillips (NYSE: COP) put one new rig to work in the Permian Basin.
Although the mainstream media made a big deal out of this development, investors shouldn’t misconstrue the bottoming in the rig count as the precursor to a meaningful recovery in drilling activity or a significant rally in crude-oil prices.
For one, recent moves to add rigs suggest that service costs have declined to levels where management teams have the confidence to spend money in pursuit of solid returns.
Meanwhile, the speed at which North American exploration and production companies complete their inventories of drilled wells will play a more important role in driving near-term production trends.
The quality of the acreage being drilled, a growing interest in re-fracturing wells, the focus on enhanced completion techniques that bolster initial productions rates and the high-grading of the active US drilling fleet likewise suggest that the rig count won’t need to recover to its former highs to maintain the current level of production.
Investors should also pay attention to trends in the international rig counts. Although the number of active drilling units outside North America hasn’t declined as precipitously, the rig count is down almost 19 percent in Latin America, 22 percent in Europe and 28 percent in Africa.
Given the longer cycle times associated with these developments, the decline in the international rig count won’t translate into lower output right away. However, this trend does represent an opportunity for short-cycle developments in US shale plays to win market share in coming years.
Despite Brent crude oil averaging more than $100 per barrel and West Texas Intermediate crude oil averaging almost $95 per barrel for four years, the oil and gas industry’s huge investments in mega-projects have failed to offset shrinking output in non-OPEC countries outside North America.
Elliott and Roger on Mar. 20, 2018
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