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In its weekly release, Houston-based oilfield services company Baker Hughes Inc. (BHI - Analyst Report) reported a drop in the U.S. rig count (number of rigs searching for oil and gas in the country). This fall can be traced back to a decrease in the tally of oil-directed rigs, partially offset by higher gas rig count.

The Baker Hughes’ data, issued since 1944, acts as an important yardstick for energy service providers in gauging the overall business environment of the oil and gas industry.

Analysis of the Data

Weekly Summary: Rigs engaged in exploration and production in the U.S. totaled 1,757 for the week ended Dec 27, 2013. This was down by 11 from the previous week’s rig count.

Despite this, the current nationwide rig count is more than double the lowest level reached in recent years (876 in the week ended Jun 12, 2009), though it is still below the prior-year level of 1,763. It rose to a 22-year high in 2008, peaking at 2,031 in the weeks ending Aug 29 and Sep 12.

Rigs engaged in land operations descended by 16 to 1,676, offshore drilling was flat at 61 rigs, and inland waters activity remained steady at 20 units.

Natural Gas Rig Count: The natural gas rig count – which, earlier this year, slumped to its lowest point since Jun 1995 – increased for the third time in 4 weeks to 374 (a gain of 2 rigs from the previous week). Despite the weekly growth, the number of gas-directed rigs is down by 53.9% from its 2012 peak of 811.

In fact, the current natural gas rig count remains 76.7% below its all-time high of 1,606 reached in late summer 2008. In the year-ago period, there were 431 active natural gas rigs.

Oil Rig Count: The oil rig count – that rocketed to a 25-year high of 1,432 in August last year – fell by 13 to 1,382. Nevertheless, it has recovered strongly from a low of 179 in Jun 2009, rising 7.7 times.

Miscellaneous Rig Count: The miscellaneous rig count (primarily drilling for geothermal energy) at 1 was up by 1 from the previous week.

Rig Count by Type: The number of vertical drilling rigs fell by 18 to 387, 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) increased by 7 to 1,370. In particular, horizontal rig units – that reached an all-time high of 1,193 in May 2012 – increased by 6 from the last week’s level to 1,146.

Gulf of Mexico (GoM): The GoM rig count remained unchanged from the previous week at 59.

Conclusion

A Key Barometer of Drilling Activity: An increase or decrease in the Baker Hughes rotary rig count heavily weighs on the demand for energy services such as drilling, completion and production from companies that include large-cap names like Halliburton Co. (HAL - Analyst Report) and Schlumberger Ltd. (SLB - Analyst Report). However, our preferred pick in this group is Core Laboratories N.V. (CLB - Analyst Report). The Amsterdam, Netherlands-based firm – carrying a Zacks Rank #2 (Buy) – has a solid secular growth story with potential to rise from the current level.
 

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