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Rig Count Rundown

By Peter Staas on Jul. 8, 2015
nternational RIg Counts -- Small

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.

US Rig counts

A handful of publicly traded oil and gas producers have announced plans to add drilling rigs in recent weeks:

  • 06/25/15: WPX Energy (NYSE: WPX) issued a press release announcing plans to resume well completions in the second half and add two rigs in the Williston Basin by year-end, citing lower production costs an improving recovery rates.
  • 06/10/15: Bill Barrett Corp (NYSE: BBG) announced an increase to its planned capital expenditures that involves adding a second rig to the Northeast Wattenberg area in Colorado’s Denver-Julesburg Basin. This drilling unit will sink 11 gross wells this year that feature extended laterals.
  • 05/12/15: Parsley Energy’s (NYSE: PE) first-quarter earnings release calls for the company to add three horizontal rigs in June and run a total of four for the remainder of the year.
  • 05/07/15: Diamondback Energy’s (NSDQ: FANG) first-quarter earnings release indicated that the Permian Basin-focused producer would add two horizontal rigs later in 2015 if service cost reductions hold.
  • 06/01/15: In a press release announcing the sale of its midstream assets in the Eagle Ford Shale, Pioneer Natural Resources (NYSE: PXD) reiterated plans to add two horizontal rigs per month in the Permian Basin for the remainder of the year—a total of 12 drilling units.

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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.

International RIg Counts

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.

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