In
its weekly release, Houston-based oilfield services company Baker
Hughes Inc. BHI reported a rise in the U.S. rig count (number of rigs
searching for oil and gas in the country) – the twenty-second increase
in 25 weeks. This can be attributed to addition in the tally of
oil-directed rigs as commodity price ticks up and efficiencies improve.
Analysis of the Data
Weekly Summary:
Rigs engaged in exploration and production in the U.S. totaled 637 for
the week ended December 16, 2016. This was up by 13 from the previous
week’s rig count and continues the trend of recent increases that has
only been snapped thrice since June. Since plunging to an all-time low
of 404 in May, rig counts have generally been rising over the past 7
months, with the addition of a flood of new units into an improving
commodity price environment.
Oils-Energy Sector 5YR % Return
Oils-Energy Sector 5YR % Return
This
steady climb has boosted the current nationwide rig count closer to the
prior-year level of 709. It rose to a 22-year high in 2008, peaking at
2,031 in the weeks ending August 29 and September 12.
For
the week under review, the rig count was lifted entirely by units
engaged in land operations, which rose by 13 to 614. Meanwhile, inland
waters activity and offshore drilling remained steady at 1 and 22 units,
respectively.
Oil Rig Count:
The oil rig count – that bottomed at a 6-year low of 316 in May 2016 –
improved further (by 12) to 510. All of the growth came in West Texas’
Permian Basin, which now accounts for 258 rigs, or more than half of all
the nation’s oil rigs.
With
the Permian shale producing region continuing to see large increases in
the rig count, the number of active domestic oil units have gone up in
twenty-six of the last 28 weeks. As a result of this sustained gain, the
current tally is now the highest in 11 months. Nevertheless, they are
still below the previous year’s rig count of 541 and only about 32% of
the peak of 1,609 in Oct 2014.
Natural Gas Rig Count: The
natural gas rig count – which plunged to their lowest level on record
in Aug – inched up for the thirteenth time in 16 weeks to 126 (a gain of
1 rig from the previous week). Still, as per the most recent report,
the number of natural gas-directed rigs are languishing 92% below the
all-time high of 1,606 reached in late summer 2008. In the year-ago
period, there were 168 active natural gas rigs.
Miscellaneous Rig Count: The miscellaneous rig count (primarily drilling for geothermal energy) at 1 remained unchanged from the previous week.
Rig Count by Type:
The number of vertical drilling rigs increased by 1 to 71, 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) was up by 12 to 566. In
particular, horizontal rig units jumped by 9 from last week’s level to
512 – up by 63% since the bottom in late May 2016.
Gulf of Mexico (GoM): The GoM rig count was flat at 22 – all of these oil-directed.
Conclusion: Good Time to Add Oil Service Stocks: The
Baker Hughes data, issued since 1944 at the end of every week, acts as
an important yardstick for energy service providers in gauging the
overall business environment of the oil and gas industry.
This
generates considerable excitement among energy investors and has long
been deployed to help predict future oil and gas production. When number
of rigs increase, as is the case now, additional wells are drilled.
This means new oil and gas are discovered, and ultimately production
picks up.
In
essence, a rise in the Baker Hughes rotary rig count positively weighs
on the demand for energy services – drilling, completion, production,
etc. At this juncture, adding a few of these stocks to your portfolio
might as well make for a prudent option,
How to Identify Outperformers?
With
a wide range of energy firms thronging the investment space, it is by
no means an easy task for investors to arrive at stocks that have the
potential to deliver attractive returns. While it is impossible to be
sure about such outperformers, this is where the Zacks Rank, which
justifies a company’s strong fundamentals, can come in really handy.
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