In its weekly release, Houston-based oilfield services company
Baker Hughes Inc.
) reported a dip in the U.S. rig count (number of rigs searching
for oil and gas in the country).
This can be attributed to cutbacks in the tally of gas-directed
rigs, partially offset by increase in oil and miscellaneous rig
counts. In particular, the natural gas rig count dropped for the
seventeenth time in 20 weeks to touch a new 10-year low, while oil
drilling jumped to another 25-year high.
The Baker Hughes rig count, issued since 1944, acts as an
important yardstick for drilling contractors such as
Transocean Inc. (
Diamond Offshore (
Noble Corp. (
Nabors Industries (
Patterson-UTI Energy (
Helmerich & Payne (
, etc. in gauging the overall business environment of the oil and
Analysis of the Data
Rigs engaged in exploration and production in the U.S. totaled
1,983 for the week ended May 25, 2012. This was down by 3 from the
previous week's count and represents the eighth decrease in the
past 17 weeks.
Despite this, the current nationwide rig count is more than
double that of the 6-year low of 876 (in the week ended June 12,
2009) and significantly exceeds the prior-year level of 1,847. It
rose to a 22-year high in 2008, peaking at 2,031 in the weeks
ending August 29 and September 12.
Rigs engaged in land operations descended by 4 to 1,913, while
offshore drilling was up by 1 to 48 rigs. Meanwhile, inland waters
activity remained steady at 22 units.
Natural Gas Rig Count:
The natural gas rig count decreased for the seventeenth time in 20
weeks to 594 (a drop of 6 rigs from the previous week). As per the
most recent report, the number of gas-directed rigs is at their
lowest level since April 5, 2002 and is down more than 36% from its
2011 peak of 936, reached during mid-October.
The current natural gas rig count remains 63% below its all-time
high of 1,606 reached in late summer 2008. In the year-ago period,
there were 881 active natural gas rigs.
Oil Rig Count:
The oil rig count was up by 1 to 1,383. The current tally - the
highest since Baker Hughes started breaking up oil and natural gas
rig counts in 1987 - is way above the previous year's rig count of
958. It has recovered strongly from a low of 179 in June 2009,
rising more than 7.7 times.
Miscellaneous Rig Count:
The miscellaneous rig count (primarily drilling for geothermal
energy) at 6 was up by 2 from the previous week.
Rig Count by Type:
The number of vertical drilling rigs rose by 4 to 570, 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 7 at
1,413. In particular, horizontal rig units came off by 2 from last
week's all-time high of 1,191.
As mentioned above, the natural gas rig count has been falling
since the last few weeks, 340 rigs in fact (or 36%) from the recent
highs of 934 in October 28.
Is this bullish for natural gas fundamentals? The answer is
"no," if we look at the U.S. production and the shift in rig
With horizontal rig count - the technology responsible for the
abundant gas drilling in domestic shale basins - currently close to
its all-time high, output from these fields remains robust. As a
result, gas inventories remain at elevated levels - up some 40%
above the benchmark five-year average levels.
Hamstrung by this huge surplus, natural gas prices have dropped
approximately 48% from 2011 peak of $4.92 per million Btu (MMBtu)
in June to the current level of around $2.55 (referring to spot
prices at the Henry Hub, the benchmark supply point in Louisiana).
Incidentally, prices hit a 10-year low of $1.82 during late
To make matters worse, a near-record mild weather across most of
the country curbed natural gas demand for heating, leading to an
early beginning for the stock-building season. The grossly
oversupplied market continues to pressure commodity prices in the
backdrop of sustained strong production.
This has forced several natural gas players to announce
drilling/volume curtailments. Exploration and production outfits
Ultra Petroleum Corp.
Talisman Energy Inc.
) have all reduced their 2012 capital budget to minimize
investments in development drilling.
On the other hand, Oklahoma-based
Chesapeake Energy Corp.
) - the second-largest U.S. producer of natural gas behind
Exxon Mobil Corp.
) - and rival explorer
) have opted for production shut-ins to cope with the weak
environment for natural gas that is likely to prevail during the
However, we feel these planned reductions will not be enough to
balance out the massive natural gas supply/demand disparity, and
therefore we do not expect much upside in gas prices in the near
term. In other words, there appears no reason to believe that the
supply overhang will subside in 2012.
With natural gas unlikely to witness a durable rebound in prices
from their multi-year plight and at the same time crude prices
trading in the $90-$100 a barrel range, energy producers are
boosting liquids exploration to take advantage of this trend. As a
result of movement of rigs away from natural gas towards oil, the
tally of liquids-directed rigs has climbed to another 25-year
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