U.S. Rig Count Hits 8-Month High

According to data from Baker Hughes Inc. (BHI - Analyst Report), the number of rigs searching for oil and gas in the U.S. rose for the week ended Nov. 20, reflecting ramped-up drilling activity by the producers amid recent optimism about economic recovery.

As shown in the first chart below from Baker Hughes, rigs exploring and producing in the U.S. totaled 1,113 during the week. This is up by 12 from the previous week’s tally and represents the fifth successive weekly gain. The current nationwide rig count is 27% higher from the 2009 low of 876 (set in the week ended June 12).

The combined oil and gas rig count is down by 828 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. decreased by 2 to 726 -- the second loss in as many weeks. The rig count remains 55% lower than its peak of 1,606 in late summer 2008. In the year-ago period, there were 1,511 active natural gas rigs. This is shown in the following chart, also from Baker Hughes.



The oil rig count was up by 14 to 375, maintaining the positive momentum from the past nine weeks. But the tally is down approximately 11% from the previous year’s count of 419, as shown in the following chart from Baker Hughes. Oil rigs peaked at 442 in early November last year.



The number of miscellaneous rigs, at 12, remains unchanged from the previous week.

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, during recent weeks, there have been signs that the companies were beginning to bring rigs back on line (especially oil rigs) amid signs of economic stabilization that could drive up energy demand. This pushed the nationwide rig count above 1,100 working units for the week ended Nov. 13, the first time since March.

The overall picture, though, remains weak, particularly for natural gas, whose inventories have recently hit a new record high of 3.83 trillion cubic feet (Tcf) and is threatening to test the maximum capacity of 3.89 Tcf. The supply picture is expected to reverse in the coming months as producers bet on colder weather and the lagging effect of the sharp drop in domestic drilling activity takes hold.

Until then, we believe that natural gas woes (especially in North America) will continue to haunt energy service firms like Halliburton Company (HAL - Analyst Report), Schlumberger Limited (SLB - Analyst Report), Baker Hughes, Smith International Inc. (SII - 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.

We also maintain our Neutral recommendations for contract drillers such as Nabors Industries (NBR - Analyst Report), Patterson-UTI Energy (PTEN - Analyst Report) and Helmerich & Payne, Inc. (HP - Analyst Report), given the extent of excess capacity in the sector that is expected to weigh on dayrates and margins well into next year.

We are positive on oilfield companies like Cameron International (CAM - Analyst Report) that derives about two-thirds of its revenue from outside North America. Cameron’s international operations are expected to be a key growth driver for the firm going forward and will play an offsetting role to the relatively soft U.S. drilling scene.

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