Is Crude Oil Price Weakness Dragging the US Rig Count?
Crude oil and natural gas rigs
According to Baker Hughes (BHI), in the week ended September 4, the US rig count decreased by 13 crude oil rigs, while the natural gas rig count remained unchanged. Before last week, crude oil rigs continued to increase in the past few weeks, while the natural gas rig count has been volatile.
In the 12 months ended September 4, the total US crude oil and natural gas rig count fell by 1,061, or 55%. The number of active oil rigs fell by 922, or 58%. The number of natural gas rigs fell by 138, or ~41%, over this period.
Why rig count trends matter
Rig counts tell us how many rigs are actively drilling for oil and gas. Analyzing the change in the number of active rigs can help us understand how long-term supply could evolve. Oil and gas rig counts signal how confident producers are about drilling for oil and gas.
Rising rig counts could indicate a potential increase in supplies in the months to come. In contrast, falling rig counts point to a potential stagnation in supplies.
Effect on energy companies
The 55% fall in active rigs in the past year indicates a fall in exploration and production activity by upstream oil and gas companies. Apart from upstream energy companies, falling natural gas rig counts over the past year would negatively affect natural gas compression services providers like Exterran Holdings (EXH) and Exterran Partners (EXLP).
The falling trend over the past year would also negatively affect Dresser-Rand Group (DRC), which provides equipment for oil and gas transportation. Drill equipment makers like Schlumberger (SLB) and Halliburton (HAL) also suffer if rig counts decrease. A lower rig count should reduce oilfield service companies’ revenue, as upstream companies reduce exploration and production activity and push oilfield service companies for lower contract terms or day rates to save on costs. Schlumberger forms 21.9% of the Market Vectors Oil Services ETF (OIH).
Lower crude oil and natural gas production could negatively affect midstream energy MLPs like Williams Partners (WPZ), Energy Transfer Partners (ETP), MarkWest Energy Partners (MWE), and Enbridge Energy Partners (EEP) due to lower volumes.
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