US Crude Oil, Natural Gas Rig Counts Rise: Is This a Good Thing?
Offshore rig count increases
In the week ended August 7, 2015, the US offshore rig count increased by four compared to the previous week, to 38 rigs. Offshore rig counts have averaged 31 over the past eight weeks. The offshore rig count is nearly 42% off its four-year high of 66 in August 2014. In the 12 months leading up to August 7, the offshore rig count fell by 24, or 39%.
Offshore wells are more expensive than onshore wells, but they have much longer production lives. Offshore projects also have long lead times. Falling crude oil prices don’t affect planned offshore projects in the short term.
The Louisiana section of the Gulf of Mexico accounts for almost all US offshore drilling. According to the U.S. Energy Information Administration, thirteen projects are expected to start in the Gulf of Mexico in the next two years, eight in 2015, and five in 2016. This could explain the sharp rise in offshore rigs we’ve seen over the last couple of weeks.
Rig utilization
Jack-up rigs are mobile offshore drilling units that perform drilling and workover operations to lift energy. According to the industry news organization Rigzone, the use of jack-up rigs stood at 62.8% on August 7, 2015. In comparison, use was ~78% a year ago. Rigzone estimates that the use of jack-up rigs will likely fall below 50% in 2015 due to lower crude oil prices.
Offshore rig counts indicate how busy rig operators like Transocean (RIG) and Ensco plc (ESV) are at any given time. Offshore rig counts can also determine the activity levels of subsea oilfield service equipment and technology providers like Cameron International (CAM) and FMC Technologies (FTI). Rig counts also help investors foresee revenue trends for offshore rig equipment manufacturers like Oil States International (OIS).
Ensco accounts for 2.9% of the Market Vectors Oil Services ETF (OIH).
Trends in the offshore rig count also indicate offshore energy activity by upstream and integrated energy companies. ExxonMobil (XOM) and Royal Dutch Shell (RDS.A) have offshore operations.
Steady production, led by a stable rig count in the Gulf of Mexico, should also help midstream MLPs that operate in the Gulf of Mexico region such as Energy Products Partners (EPD), Shell Midstream Partners (SHLX), and MarkWest Energy Partners (MWE).
Browse this series on Market Realist: