In its weekly release, Houston-based oilfield services company
Baker Hughes Inc.
) reported a rise in the U.S. rig count (number of rigs searching
for oil and gas in the country). This can be attributed to an
increase in the tally of oil-directed rigs, partially offset by
cutbacks in natural gas rig count.
In particular, the natural gas rig count dropped for the sixth
time in 7 weeks to touch a near 13-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
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
1,984 for the week ended June 8, 2012. This was up by 4 from the
previous week's count and represents the first increase in the past
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 1,855. 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 climbed by 3 to 1,914, while
offshore drilling was up by 1 to 49 rigs. Meanwhile, inland waters
activity remained steady at 21 units.
Natural Gas Rig Count:
The natural gas rig count decreased for the sixth time in 7 weeks
to 565 (a drop of 23 rigs from the previous week). As per the most
recent report, the number of gas-directed rigs is at their lowest
level since September 10, 1999 and is down approximately 40% from
its 2011 peak of 936, reached during mid-October.
The current natural gas rig count remains 65% below its all-time
high of 1,606 reached in late summer 2008. In the year-ago period,
there were 879 active natural gas rigs.
Oil Rig Count:
The oil rig count was up by 28 to 1,414. 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
969. It has recovered strongly from a low of 179 in June 2009,
rising nearly 8 times.
Miscellaneous Rig Count:
The miscellaneous rig count (primarily drilling for geothermal
energy) at 5 was down by 1 from the previous week.
Rig Count by Type:
The number of vertical drilling rigs fell by 8 to 572, 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 up by 12 at
1,412. In particular, horizontal rig units - that reached an
all-time high of 1,193 in May this year - decreased by 6 from last
week's level to 1,177.
As mentioned above, the natural gas rig count has been falling
since the last few months, 369 rigs in fact (or 40%) 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 32%
above the benchmark five-year average levels.
Hamstrung by this huge surplus, natural gas prices have dropped
more than 53% from 2011 peak of $4.92 per million Btu (MMBtu) in
June to the current level of around $2.30 (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 $80-$90 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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