U.S. Rig Count Springs to 2019 - Analyst Blog

In its weekly release, Houston-based oilfield services company Baker Hughes Inc. (BHI) reported a rise in the U.S. rig count (number of rigs searching for oil and gas in the country), primarily reflecting a jump in the tally of oil-directed rigs.

The Baker Hughes rig count, issued since 1944, acts as an important yardstick for drilling contractors such as Transocean Inc. (RIG) , Diamond Offshore (DO) , Noble Corp. (NE) , Nabors Industries (NBR) , Patterson-UTI Energy (PTEN) and Helmerich & Payne (HP) in gauging the overall business environment of the oil and gas industry.

Weekly Summary

Rigs engaged in exploration and production in the U.S. totaled 2,019 for the week ended December 16, 2011. This was up by 32 from the previous week's rig count and represents the first increase in 6 weeks.

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 1,709. 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 28 to 1,959, while inland waters activity and offshore drilling increased by 2 each to 17 and 43, respectively.

Natural Gas Rig Count

The natural gas rig count decreased for the seventh week in a row to 818 (a drop of 2 rigs from the previous week). As per the most recent report, the number of gas-directed rigs is at their lowest level since January 15, 2010 and is down almost 13% from its 2011 peak of 936, reached during mid-October.

The current natural gas rig count remains 49% below its all-time high of 1,606 reached in late summer 2008, but has rebounded strongly after bottoming out to a 7-year low of 665 on July 17, 2009. In the year-ago period, there were 941 active natural gas rigs.

Oil Rig Count

The oil rig count was up by 35 to 1,196. 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 756. It has recovered strongly from a low of 179 in June 2009, rising almost 6.7 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 rose by 3 to 622, 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 29 at 1,397. In particular, horizontal rig units rose by 33 in the latest week to hit a new all-time high of 1,184.

Our Take

As mentioned above, the natural gas rig count has been falling since the last few weeks, 116 rigs in fact (or 12.4%) from its recent high of 934 in October 28. Is this bullish for natural gas fundamentals? The answer is a no, if we look at the U.S. production and the shift in rig composition.

With horizontal rig count - the technology responsible for the abundant gas drilling in domestic shale basins - currently at an all-time high, output from these fields remains robust. As a result, gas inventories still remain at elevated levels - 10.3% above the 5-year average and 4.3% higher than the same period last year.

In fact, natural gas prices have dropped approximately 38% from this year's peak of about $5.00 per million Btu (MMBtu) in June to the current level of around $3.10 (referring to spot prices at the Henry Hub, the benchmark supply point in Louisiana).

In the absence of major production cuts or a stronger economy to boost industrial demand, which is responsible for almost a third of gas consumption, we do not expect much upside in gas prices in the near term. This has prompted some companies to alter their spending patterns, away from gas to the more profitable liquids-rich projects.

BAKER-HUGHES ( BHI ): Free Stock Analysis Report

DIAMOND OFFSHOR ( DO ): Free Stock Analysis Report

HELMERICH&PAYNE ( HP ): Free Stock Analysis Report

NABORS IND ( NBR ): Free Stock Analysis Report

NOBLE CORP ( NE ): Free Stock Analysis Report

PATTERSON-UTI (PTEN): Free Stock Analysis Report

TRANSOCEAN LTD (RIG): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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