Baker Hughes (NYSE:BHI) released its North American rig count data last week in what was its first report of drilling activity for this year.  The number of rigs drilling for oil and gas in North America stood at 2020, falling by around 15% since last year, weighed down by weak gas drilling and partially offset by an increase in land and offshore oil exploration activity. Here we examine some of the changes in the North American drilling landscape over the past year and what it could mean for the oil field services stocks that we cover.
The rotary rig count serves as an important barometer of activity in the oilfield services industry, determining the demand for products and services provided by oil field service companies such as Halliburton (NYSE: HAL), Baker Hughes and Schlumberger (NYSE: SLB). Higher rig counts typically result in higher revenues and stronger demand for oil field services, which could drive up profits as well. The rig count typically rises when there is a positive outlook for oil prices and economic activity is strong.
North American Rig Count
US Gas Drilling: A large portion of the drop in North American drilling can be attributed to the decline in natural gas drilling. The number of gas rigs has declined by almost 46% from last year to around 439 rigs. Strong supplies of shale gas drove natural gas prices in the U.S. to near their 10-year lows last year. All the oil field services firms that we cover have been impacted by this trend particularly due to their exposure to the pressure pumping market. Low gas prices have caused pumping capacity to move away from gas plays to liquid rich plays like shale oils.
This has impacted pricing and margins since liquid plays typically require lower pressures and hence lower pumping capacities, causing an oversupply of pumping capacity in the North American market. However, we believe that gas drilling could pick up in the near future as natural gas prices have been gradually increasing on increased usage by the utility and industrial sectors.
US Oil Drilling: Although domestic oil consumption remains relatively weak, the U.S. is seeking to improve its energy independence and reduce oil imports. This has caused an increase in drilling for oil with the oil rig growing by nearly 11% over the last year.((U.S. Oil Demand Likely to Rise 0.3% in 2013, EIA Says, WSJ)) Given that the United States was expected to become the world’s largest oil producer by the end of 2012, we expect oil drilling activity to continue its uptrend. (See Also: Halliburton Will Gain As US Poised To Become World’s Largest Oil Producer)
Much of the growth in US oil production is expected to come from unconventional resources like shale oils and tight oils, and this could benefit oil field service firms like Halliburton and Schlumberger which have strong expertise with unconventional plays. Unconventional plays typically command higher rates and could offer better margins for oil field service firms.
North American Offshore: The number of rigs working offshore grew by around 22% since last year. Exploration activity in the U.S. Gulf of Mexico (GoM) is particularly strong as higher oil prices are making it feasible for oil and gas companies to explore in deeper waters. Last year, the region witnessed the highest number of deepwater drilling permits issued since 2007. Offshore drilling is attractive for oil field service firms since it garners relatively higher rates compared to land-based drilling and allows firms to provide integrated services. Potential risks in the Gulf of Mexico include rising competition from U.S.-based players and more stringent regulations following the 2010 oil spill which could impact margins.
Drilling In Canada: Drilling activity in Canada dropped by around 30% over the last year on the back of commodity price uncertainty which has caused oil and gas companies to curtail their upstream budgets. Weak natural gas prices have also resulted in subdued gas drilling activity. The rig count stood at 258, down from around 361 last year.
Drilling activity displays a strong seasonal trend in Canada. The activity is typically the highest in the first quarter, thanks to the firm and frozen ground which makes it feasible to move heavy drilling equipment to remote areas where there are no roads. The activity typically slows down in the second quarter due to the spring break-up and gains momentum again in the third and fourth quarters. This year, however, the winter drilling activity in December has been weak in western Canada and, if this trend persists into Q1, it could adversely impact oil field service firms.Notes: