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What's Driving Oil Rig Count in the US Despite Weak Crude?

In its weekly release, Houston-based oilfield services Baker Hughes, a GE company BHGE reported a rise in rigs searching for crude in the country while rigs for natural gas declined.  

Details

Weekly Summary: Rigs engaged in the exploration and production of oil and natural gas in the U.S. totaled 949 in the week ended Aug 11 – lower than the previous week’s 954. This shows that the total rig count in the country has declined for two weeks in a row.

Since it hit an all-time low of 404 last May, rig count has been rising rapidly in American shale resources. Punctuated by a few pauses, the current nationwide rig count is considerably higher than the prior-year level of 481.

For the week in discussion, the decline in rig count can be attributed to lower onshore activity (now at 928 compared to last week’s 934). However, units engaged in offshore operations increased slightly to 18 counts from 17 in the prior week.

Oil Rig Count: Oil rig count jumped by three to 768. This emphasizes that the rigs exploring for crude rose again after last week’s fall. Also, the current tally, though far off from the peak of 1,609 attained in Oct 2014, is significantly above the previous year’s count of 396.   

Natural Gas Rig Count: The natural gas rig count – which plunged to its lowest last August – inched down for the seventh time in 14 weeks to 181 (a fall of eight rigs from the previous week). Like oil, the count of rigs for gas exploration sits comfortably above the year-ago tally of 83. As per the most recent report, the number of natural gas-directed rigs is nearly 89% below the all-time high of 1,606 achieved in late summer 2008.

Rig Count by Type: The number of vertical drilling rigs fell by one unit to 72, 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 six to 801.

Gulf of Mexico (GoM): The GoM rig count went up to 17 units – 15 of which were oil-directed – from 16 counts.

Details of the Weekly Rig Count

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.

Change in 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

Although the number of rigs searching for natural gas in the U.S. declined from the prior week, the rig exploring for crude rose despite persistently weak oil prices. In other words, debt-laden shale drillers have proved that their operations are still profitable despite crude trading below the $50-per-barrel threshold.

Let’s analyze the broader macro scenarios supporting shale players. OPEC and 11 non-OPEC players, including Russia, decided in the Vienna meeting on May 25, to extend the production cut deal until Mar 2018. Also, according to Saudi Arabia, there is a possibility of deeper production cut, if required, in the 173rd OPEC meeting on Nov 30, 2017. Thus, it is an ideal time for shale players to increase production at the expense of OPEC, especially because oil is trading way above the historical low of mid-February last year. No wonder, U.S. shale producers have again started gathering to oil patches as they aim to sell the commodity at higher prices.

We should consider President Trump’s exit from Paris Climate accord as a factor encouraging drillers to continue pumping more oil. 

Now, it will be prudent to wait and watch whether shale drillers will continue to add rigs in oil resources.

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Weatherford International PLC (WFT): 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
 
Baker Hughes Incorporated (BHGE): Free Stock Analysis Report
 
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