Zacks
0
All posts from Zacks
Zacks in Our Research. Your Success.,

A Rare Fall in U.S. Rig Count: Are Shale Drillers Slowing?

In its closely watched weekly release, Houston-based oilfield services company Baker Hughes Inc. BHI reported a rare fall in the U.S. rig count (number of rigs searching for oil and gas in the country) – the first decrease in 24 weeks.

Analysis of the Data

Weekly Summary: Rigs engaged in exploration and production in the U.S. totaled 940 for the week ended June 30, 2017. This was down by 1 from the previous week’s rig count and breaks the impressive trend of recent increases that has only been snapped five times since June 2016.

Since plunging to an all-time low of 404 in May last year, rig counts have generally been rising over the past 12 months, with the addition of a flood of new units due to the rapid growth in American shale production.

As a result of the steady climb – punctuated by a few pauses – the current nationwide rig count is considerably higher than the prior-year level of 431. 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, the 1-unit fall in rig count could be attributed to lower offshore activity (now at 21 compared to last week’s 22), while units engaged in land operations and inland waters stayed flat at 915 and 4, respectively.

Oil Rig Count: The oil rig count – that last week reached its highest since April 2015 – declined by 2 to 756. The current tally, though far off the peak of 1,609 in October 2014, is significantly above the previous year’s rig count of 341 following 23 successive increases prior to last week.  

Natural Gas Rig Count: The natural gas rig count – which plunged to their lowest level on record in August last year – inched up for the eighth time in 11 weeks to 184 (a gain of 1 rig from the previous week). Like oil, a string of weekly rig additions has meant that the present count sits comfortably above the year-ago tally of 89. Still, as per the most recent report, the number of natural gas-directed rigs are languishing 89% below the all-time high of 1,606 reached in late summer 2008.

Rig Count by Type: The number of vertical drilling rigs remained unchanged at 77, 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 1 to 863. In particular, horizontal rig units stayed put at 792 – the most since April 2015.

Gulf of Mexico (GoM): The GoM rig count was flat at 21 – 18 of those oil-directed.

About the Baker Hughes Weekly Rig Count Data

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.

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

Conclusion

So, what does the first weekly rig count decline in six months indicate? Does it point to decelerating U.S. production, or is it just a blip before growth resumes again?

Lately, there have been some signs of brake in shale oil production. Yes, output is still climbing but growth might have slowed down. According to the U.S. Energy Information Administration (EIA), domestic crude volumes have declined thrice in the last 8 weeks. Per the most recent report, U.S. output decreased 100,000 barrels per day – the largest fall since July 2016. As a proof, crude inventories have tumbled over 26 million barrels during the past 3 months. And with it, the pace of new rig addition has slowed down as well.    

However, there’s no denying that the U.S. still remains awash with excess oil that is derailing bulk of the OPEC-led cuts aimed at rebalancing the market. At 509.21 million barrels, current crude supplies are up 2.7% from the year-ago period and are in the upper limit of the average range during this time of the year. Worryingly, the major U.S. basins like the Permian, Arkoma Woodford and Haynesville shale continue to add rigs.  

Therefore, it will be prudent to wait and watch whether this week’s retreat in rig count could be sustained.

Till then, in case you are looking for energy names for your portfolio, one could opt for Canadian Natural Resources Ltd. CNQ. It has a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Calgary, Alberta-based Canadian Natural Resources is engaged in the acquisition, development and exploitation of crude oil and natural gas properties. The 2017 Zacks Consensus Estimate for this company is $1.31, representing some 725% earnings per share growth over 2016. Next year’s average forecast is $2.52, pointing to another 92% growth.

5 Trades Could Profit "Big-League" from Trump Policies                                                                                                           

If the stocks above spark your interest, wait until you look into companies primed to make substantial gains from Washington's changing course.

Today Zacks reveals 5 tickers that could benefit from new trends like streamlined drug approvals, tariffs, lower taxes, higher interest rates, and spending surges in defense and infrastructure. See these buy recommendations now >>


Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
 
Weatherford International PLC (WFT): Free Stock Analysis Report
 
Canadian Natural Resources Limited (CNQ): Free Stock Analysis Report
 
Baker Hughes Incorporated (BHI): Free Stock Analysis Report
 
Schlumberger N.V. (SLB): Free Stock Analysis Report
 
Halliburton Company (HAL): Free Stock Analysis Report
 
Transocean Ltd. (RIG): Free Stock Analysis Report
 
Diamond Offshore Drilling, Inc. (DO): Free Stock Analysis Report
 
To read this article on Zacks.com click here.
 
Zacks Investment Research