October Rig Count Data And Outlook For The Oilfield Services Industry

Baker Hughes (NYSE: BHI) recently released the global rig count for October, reporting a total of 3,458 rigs actively exploring for oil and gas across the world. Although the rig count was almost flat sequentially, it fell by about 8% since last year. ^[1]  The decline, which was due to reduced natural gas exploration in North America and lower activity in Latin America, was partially offset by an increase in exploration in the Middle East and Africa.

The rotary rig count acts as a yardstick of activity in the oil field services industry, determining the demand for drilling, completion and production services provided by firms like Halliburton (NYSE: HAL), Baker Hughes and Schlumberger (NYSE: SLB). Here are some of the factors that we believe will drive the rig count and the broader oil field services sector going forward.

US Election Results

President Obama’s re-election could result in harsher regulations for the US drilling industry. The President has traditionally had a pro-renewables stance, calling for tougher environmental standards and subsidy cuts for fossil fuels. His second term could see stricter regulations relating to drilling on federal lands, tougher standards and disclosure requirements for hydraulic fracturing and the elimination of subsidies to the tune of $46 billion for conventional fuels like oil. These measures are likely to drive up exploration costs.

A second term will also mean that the status quo is maintained with regards to regions for offshore drilling. Unlike his opponent Mitt Romney, the President was not in favor of opening additional regions for offshore drilling. Currently, the US only permits offshore drilling in the Gulf of Mexico and Alaska, leaving out about 85% of the US continental shelf including the East and West coasts off limits for oil exploration.

Natural Gas Prices

Depressed natural gas prices caused the North American gas rig count to decline by about 53% over last year. However, we believe that a reversal in the rig count is near since gas prices have picked up significantly over the last few months. Several industrial consumers and utility firms are opting to invest in natural gas fired plants, thanks to cheaper generation costs and lower emissions. The energy mix of the United states has been gradually shifting towards natural gas at the expense of coal. A continued shift in the mix could see an increase in gas demand and higher exploration activity driving up the gas rig count.

Favorable Conditions In The Middle East And Africa

High oil prices, new discoveries, and favorable geopolitical factors have helped to boost exploration activity in Africa and the Middle East. We expect exploration in the region to be strong going forward thanks to mobilization of rigs into Iraq and increasing drilling activity in Libya following the end of the civil war. International oil and gas companies are playing an increasing role in these two economies given their vast resources which have been largely untapped.

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1. Rotary Rig Count, Baker Hughes [↩]