(BHI) Natural Gas Drilling Rig Count at 28-Month Low

In its weekly release, Houston-based oilfield services company Baker Hughes Inc. (BHI) reported a dip in the U.S. rig count (number of rigs searching for oil and gas in the country). This can be primarily attributed to a decrease in the tally of natural gas-directed rigs, partially offset by an improved oil rig count.

The Baker Hughes rig count, issued since 1944, acts as an important yardstick for drilling contractors such as Transocean Inc. (RIG), Diamond Offshore (DO), Noble Corp. (NE), Nabors Industries (NBR), Patterson-UTI Energy (PTEN), Helmerich & Payne (HP), etc. 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 1,989 for the week ended February 10, 2012. This was down by 8 from the previous week’s count and represents the second successive decline.

Despite this, the current nationwide rig count is more than double that of the 6-year low of 876 (in the week ended June 12, 2009) and significantly exceeds the prior-year level of 1,721. It rose to a 22-year high in 2008, peaking at 2,031 in the weeks ending August 29 and September 12.

Rigs engaged in land operations descended by 6 to 1,932, while offshore drilling was down by 2 to 40 rigs. Meanwhile, inland waters activity remained steady at 17 units.

Natural Gas Rig Count: The natural gas rig count decreased for the fifth week in a row to 720 (a drop of 25 rigs from the previous week). As per the most recent report, the number of gas-directed rigs is at their lowest level since October 2, 2009 and is down more than 23% from its 2011 peak of 936, reached during mid-October.

The current natural gas rig count remains 55% below its all-time high of 1,606 reached in late summer 2008, but has rebounded strongly after bottoming out to a 7-year low of 665 on July 17, 2009. In the year-ago period, there were 906 active natural gas rigs.

Oil Rig Count: The oil rig count was up by 18 to 1,263. The current tally – the highest since Baker Hughes started breaking up oil and natural gas rig counts in 1987 – is way above the previous year’s rig count of 805. It has recovered strongly from a low of 179 in June 2009, rising over 7 times.

Miscellaneous Rig Count: The miscellaneous rig count (primarily drilling for geothermal energy) at 6 was down by 1 from the previous week.

Rig Count by Type: The number of vertical drilling rigs fell by 3 to 603, 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 down by 5 at 1,386. In particular, horizontal rig units – that reached an all-time high of 1,185 in January this year – fell by 3 from last week’s level to 1,174.

To Conclude

As mentioned above, the natural gas rig count has been falling since the last few weeks, 214 rigs in fact (or 23%) from the recent highs of 934 in October 28. Is this bullish for natural gas fundamentals? The answer is “no,” if we look at the U.S. production and the shift in rig composition.

With horizontal rig count – the technology responsible for the abundant gas drilling in domestic shale basins – currently close to its all-time high, output from these fields remains robust. As a result, gas inventories still remain at elevated levels – up 33% from both last year and the five-year average.

In fact, natural gas prices have dropped more than 50% from 2011 peak of about $5.00 per million Btu (MMBtu) in June to the current level of around $2.45 (referring to spot prices at the Henry Hub, the benchmark supply point in Louisiana).

In the absence of major production cuts or a stronger economy to boost industrial demand, which is responsible for almost a third of gas consumption, we do not expect much upside in gas prices in the near term. This is prompting more and more companies to alter their spending patterns, away from gas to the more profitable liquids-rich projects.

For example, Oklahoma-based Chesapeake Energy (CHK) – the second-largest U.S. producer of natural gas behind Exxon Mobil Corporation (XOM) – declared last week that it had already slashed more than 500 million cubic feet per day of output and may eventually raise volume cutbacks to as much as 1 billion cubic feet per day if prices stay low.

BAKER-HUGHES (BHI): Free Stock Analysis Report

CHESAPEAKE ENGY (CHK): Free Stock Analysis Report

DIAMOND OFFSHOR (DO): Free Stock Analysis Report

HELMERICH&PAYNE (HP): Free Stock Analysis Report

NABORS IND (NBR): Free Stock Analysis Report

NOBLE CORP (NE): Free Stock Analysis Report

PATTERSON-UTI (PTEN): Free Stock Analysis Report

TRANSOCEAN LTD (RIG): Free Stock Analysis Report

EXXON MOBIL CRP (XOM): Free Stock Analysis Report

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