U.S. Rig Count Snaps Gain

According to data from Baker Hughes Inc. ((BHI - Analyst Report), the number of rigs searching for oil and gas in the U.S. fell for the week ended Sept. 11, reflecting scaled back drilling activity by the producers. As shown in the first chart below from Baker Hughes, rigs exploring and producing in the U.S. totaled 999 during the week. This is down by 10 from the previous week’s tally and is the first decline in nine weeks.

The combined oil and gas rig count is down by 1,032 from the year-ago period, when it rose to a 22-year high of 2,031.



The number of natural gas rigs drilling in the U.S. decreased by 2 to 699, snapping a seven-week gain. It is currently down 56% since peaking at 1,606 in the year-ago period. This is shown in the following chart, also from Baker Hughes.



The oil rig count was down by 7 to 288, reversing the positive momentum from the previous three weeks. The tally is down more than 30% from the previous year’s count of 413, as shown in the following chart from Baker Hughes. Oil rigs peaked at 442 in early November last year.



The number of miscellaneous rigs was down by one, to 12.

Producers had curtailed oil and gas drilling over the past several months in the midst of falling commodity prices. However, during recent weeks, there have been signs that the companies were beginning to bring oil and gas rigs back on line amid signs of economic stabilization. This pushed the nationwide rig count above 1,000 working units for the week ended Sept. 4, the first time in 21 weeks.

But the most recent Baker Hughes release suggests that the gains may have already started to peter out, as rig count once again dipped below 1,000.

The overall picture remains particularly weak for natural gas, whose inventories are threatening to surpass the all-time high level. The supply picture is expected to reverse in the coming months as the lagging effect of the sharp drop in domestic drilling activity takes hold.

Until then, we prefer to stay on the sidelines with oil service firms like Halliburton Company (HAL - Analyst Report), Schlumberger Limited (SLB - Analyst Report), Baker Hughes, Smith International Inc. (SII - Analyst Report), Cameron International (CAM - Analyst Report), National-Oilwell Varco (NOV - Analyst Report) and Weatherford International Ltd. (WFT - Analyst Report). These oilfield service names have seen their revenues and earnings plunge in the last few quarters on the back of lower volumes and a very competitive pricing environment.

We have Neutral recommendations on all the above-mentioned companies.