Another Gain in U.S. Rig Count

In its weekly release on Friday, Baker Hughes Inc. (BHI - Analyst Report) reported another rise in the number of rigs searching for oil and gas in the U.S., as producers ramped up drilling activity in anticipation of better prices. The number of units exploring and producing in the U.S. climbed to 1,024 for the week ended Oct. 2 (as clear from the first chart below from Baker Hughes). This is the highest level since April, and is up by 7 from the previous week’s tally.

The combined oil and gas rig count is down by 955 from the year-ago period. It rose to a 22-year high in 2008, peaking at 2,031 in the weeks ended Aug. 29 and Sept. 12.



The number of natural gas rigs drilling in the U.S. increased by 2 to 712, the tenth gain in last eleven weeks. However, the rig count still remains 56% lower than its peak of 1,606 in late summer 2008. In the year-ago period, there were 1,544 active natural gas rigs. This is shown in the following chart, also from Baker Hughes.



The oil rig count was up by 6 to 303, maintaining the positive momentum from the past two weeks. But the tally is down more than 28% from the previous year’s count of 422, 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 9.

Producers had scaled back oil and gas drilling operations over the past several months in the midst of falling commodity prices and tighter access to credit. However, the recent numbers suggest that companies are beginning to bring oil and gas rigs back on line amid signs of economic stabilization that could drive up energy demand.

The overall picture, though, remains weak, particularly 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, Cameron International (CAM - Analyst Report), National-Oilwell Varco (NOV - Analyst Report) and Weatherford International Ltd. (WFT). 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.

In particular, we remain wary of oilfield service providers like Smith International Inc. (SII - Analyst Report), given its high North American exposure (from the W-H Energy acquisition) in the face of a collapse in the region’s drilling activities. We have Underperform recommendation on the company.