The rig count is a crucial gauge of activity in the energy industry. The number of rigs actively drilling for oil and gas serves as a leading indicator of demand for products and services used in the entire process of exploring for and drilling for hydrocarbons.
But the overall rig count, by itself, doesn't tell the whole story. Unless it is complemented by other data, it can mislead the casual observer and obscure important regional variations. Let's take a closer look at the rig count data for the past year to unveil some hidden trends.
Sharp decline in U.S. rig count
Over the past 12 months, the overall number of land rigs drilling in the U.S. declined by more than 12%, according to data collected by oil-field services firm Baker Hughes. As of the last week of December, the overall U.S. land rig count stood at 1,712, down from 1,965 in the year-ago period.
One of the biggest factors contributing to the plunge in the rig count was a massive decline in the number of rigs drilling for natural gas. Natural gas prices, which remained below $3 per thousand cubic feet during the entire first half of the year, forced some of the nation's biggest gas producers to curtail a significant amount of gas drilling and instead focus on oil and, to a lesser extent, natural gas liquids.
For instance, EXCO Resources reduced its rig count from 23, as of year-end 2011, to seven as of the end of October 2012. Similarly, Chesapeake Energy decreased the number of rigs it had drilling for dry gas drastically, to less than 10 as of November 2012, down from almost 90 in February 2011. And LINN Energy diverted its resources to focus almost entirely on a highly promising liquids-rich formation known as the Hogshooter, where it currently has eight active rigs.
As for the oil-directed rig count, while it started the year strong, it has declined every month since August. Meanwhile, the supply of crude oil has soared. The primary reason for this has been incremental technological improvements that have allowed for greater efficiency in drilling.
For instance, Whiting Petroleum registered a massive reduction in drilling expenses thanks to a successful transition toward multi-pad drilling, which has allowed the firm to drill just as many wells but with fewer rigs. And numerous other operators have reported dramatic reductions in the number of days it takes them to drill and complete a well. For instance, Kodiak Oil & Gas reported that the average number of drilling days from spud to rig release averaged between 20 and 25 days in the third quarter - a major improvement over an average of nearly 35 days a year earlier.
Digging a little deeper
While the large decline in the total U.S. rig count last year would suggest a sharp contraction in exploration and production activity, a closer analysis reveals some surprising developments. In particular, it appears that the overall rig count numbers mask an important trend - that rig count declines in some of the biggest oil-producing regions weren't nearly as sharp as the nationwide total.
For instance, Texas, which year-after-year accounts for the largest share of total U.S. crude oil production, experienced an approximately 10% fall in its land rig count over the same period, from 914 to 821. Meanwhile, the second-largest, oil-producing state, North Dakota, registered a minor 4% decline in its land rig count over the same period.
Similarly, Oklahoma, the fifth most prolific, oil-producing state in the U.S., saw just a 6% fall, from 195 to 183. Utah and Kansas, two other major oil producing states, experienced almost negligible drops in their rig counts, from 31 to 29 and from 32 to 31, respectively.
But not all states fared as well as these ones. Pennsylvania, Louisiana, and Arkansas saw massive declines in their land rig counts, markedly higher than the nationwide 12% decline. Pennsylvania's count plunged nearly 40%, while Louisiana and Arkansas each saw a 50% decline.
What's the reason behind these wide regional variations?
Why state by state rig counts varied
It boils down to the type of hydrocarbon resources that can be recovered from the predominant plays in these states. In other words, states with gassier plays saw larger reductions in drilling, while states with oilier plays were less affected.
For instance, Louisiana, known for the Haynesville Shale, Arkansas, which lays claim to the Fayetteville Shale, and Pennsylvania, famous for hosting the prolific Marcellus Shale, were among the states that saw the biggest rig count declines. All are prominent natural gas plays.
In contrast, Texas boasts two of the oiliest plays in the country - the well-known Eagle Ford Shale and the Permian Basin. Activity in these two plays remained strong throughout the year, as companies hurriedly drilled for oil. Similarly, the Bakken Shale, one of the most prolific shale oil and gas formations ever discovered in North America, carried North Dakota's production.
In terms of growth in output, the Bakken led the way with a nearly 40% rise in output over the first 10 months of the year. Meanwhile, Texas oil production jumped from 1.75 million barrels per day in January to 2.1 million barrels per day in October, according to U.S. Energy Information Administration data. Similarly, Oklahoma output rose nearly 20% over the same time frame. Even smaller oil-producing regions like New Mexico, Wyoming, and Colorado boasted high-single-digit to low-double-digit production gains over the first 10 months of the year.
According to the most recent data from Baker Hughes, the U.S. oil and gas rig count last week increased for the first time in nine weeks. The total number of rigs drilling for oil and natural gas rose by four to 1,753. Oil rigs fell by one to 1,315, while gas-directed rigs increased by five, coming in at 434.
Baker Hughes' chief financial officer, Peter Ragauss, said that he expects the rig count to stay flat in the first quarter but thinks it will decline 5% this year. Halliburton has also projected a slight decline in the rig count this year.
But others expect the rig count to gradually trend higher as supply and demand for pressure pumping equipment gradually come back into balance. Oil-field services firms, which suffered from shrinking margins for their pressure pumping equipment as new equipment inundated the North American market, should certainly hope so. We'll just have to wait and see.
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The article What the Rig Count Data Didn't Tell Us originally appeared on Fool.com.
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