A steady decline in both energy prices and the economy last quarter will prompt even more talk this month among US drillers, oilfield services companies and their investors about one number: the rig count. The sidelining of hundreds of rigs from the market had already been deemed inevitable before the price of a barrel of oil fell below $50 and natural gas spot prices hit a 16-month low.
The only question was how many rigs would have to go. The rig count is a handy way for investors in energy companies to take the temperature of the exploration and production side of the industry.
Industry estimates a few months ago -- only weeks after North American rig numbers peaked at 2,449 in September, a 23-year high -- were for a decline of 400 to 500 rigs in 2009. That now looks like far too shallow a trough, with analysts expecting at least 700 US rigs to be "stacked" before energy prices possibly start to recover, along with the economy, late next year.
So when industry players report fourth-quarter results this month, investors will be keen to hear how their expectations for rig reductions have changed since late October, when the price of crude was still above $60 a barrel. "The rig count decline is not only a function of lower commodity prices but also a good indicator of how to balance to the market," said Roger Read, senior energy analyst at Natixis Bleichroeder.
"The decline is part of bringing supply and demand back into balance." The North American rig count stood at 2,352 in November, according to figures from oilfield services company Baker Hughes Inc. Separately compiled weekly figures showed a decline of at least another 250 or so in December. Analysts at Pritchard Capital Partners believe they have spotted a trading opportunity in the cycle, saying land-driller shares tend to bottom out six months before rig numbers do.
On Wednesday, in a research note entitled "There Will Be Mud," the energy investment bank put "buy" ratings on Helmerich & Payne Inc, Nabors Industries Ltd and Pioneer Drilling Co, and all rose by about 4 percent or more. Rig counts also have very real consequences for the bottom lines of oilfield services companies, not only in terms of lost revenue but also pressure on the prices they can charge.
Weatherford International Ltd forecast that even a decline of just 400 rigs in North America in 2009 would knock more than 4 percentage points off its profit margins in the region, which were 26.5 percent in the third quarter. Most US rigs are targeting natural gas, and analysts at Houston-based investment firm Simmons & Co expect the number of those rigs alone would have to decline by 700, or 43 percent, from the 2008 peak in order to rebalance supply and demand.
"While a cut of this magnitude will ultimately reduce supply, it may not be sufficient to prevent gas-on-gas competition and weak prices through the 2009 injection period," Simmons said in a recent note, anticipating a rig count bounce-back later in the year if the economy recovers too.
Read, anticipating a decline of 700 to 750 US rigs from the peak, said factors likely to weigh on gas demand include a warm winter and less activity from big gas users, particularly in the depressed chemical industry. LyondellBasell, the world's third-largest petrochemical company, said this week it was considering filing for bankruptcy.
Pritchard expects a decline of 750 to 1,000 US rigs, and there is precedent for the dramatic end of the forecast. North America's rig count nearly halved between February 2001 and April 2002, from 1,698 to 871, according to Baker Hughes. Another question is whether some of the older rigs, pressed into use during the latest drilling boom, will ever return to the market once they are taken out.
"We are only in the beginning of a retooling process that will probably be ongoing for several years," said Juan Pablo Tardio, spokesman for Helmerich & Payne, which started introducing its new FlexRigs about a decade ago. He said land-drillers as an industry began seriously investing in newer rigs in early 2006, yet three-quarters of US land rigs are still based on older designs.
"What other industry in the world, or the United States, do you have a situation where we still use equipment that was designed three to four decades ago?" Tardio said. The technological complexity of drilling in many parts of the United States will drive adoption of newer rigs. While only 20 percent of rigs five years ago were involved in methods such as horizontal or directional drilling, about half are now.
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