Looking Up: Rising Rig Count and Halliburton's Blow-Out Quarter Underwrite Market Optimism

The domestic oil services market presented two strong data points for those anticipating a multi-year run for the oil and gas industry.

Hart Energy's exclusive rig counts measure drilling intensity. Our counts exclude units classified as rigging up or rigging down, and also exclude rigs drilling injection wells, disposal wells or geothermal wells. The result is our most accurate assessment of rigs on location working on oil or gas programs as of the sample date. While our process results in a rig tally that is lower than the published numbers from the non-proprietary rig-tracking agencies, Hart Energy believes our product presents the most accurate picture of what is actually occurring in the field.

The domestic oil services market presented two strong data points for those anticipating a multi-year run for the oil and gas industry.

Improved reporting out of California prompted a 48-unit jump in domestic land rig activity to 1,549 units active for the week ending Friday, July 15, while Halliburton piled on the good news heap Monday after announcing strong North American revenues and rising margins as second quarter earnings season started.

Of the 48-unit increase in rig count, 21 occurred in California, mostly associated with Occidental Petroleum. According to Smith International, Oxy now has 26 rigs working in California, up 12 from the prior week, which is a reflection of increased permitting levels and improved reporting in a difficult information market.

Elsewhere, 13 of the extra 48-unit increase found employment in either the Eagle Ford shale or the Bakken. The Eagle Ford shale, at 172 units, is now the nation's leading tight formation oil and gas play when it comes to drilling activity.

Pressure Cooker

Meanwhile, Halliburton levied an emphatic affirmation to the reviving Smith rig count, which had oscillated up and down over the last six weeks as weather and industry bottlenecks in people and equipment created background noise. The multi-national services giant reported North American revenues grew 16% sequentially for its completion and production segment, while its North American Drilling & Evaluation segment, which includes directional drilling, bits, and fluids, produced a 13% revenue gain versus the first quarter 2011.

Margins for Halliburton's Completion and Production segment, which includes pressure pumping, climbed above 30%, reflecting near peak profitability for this segment of the company. Overall, Halliburton reported $747 million in net income on a record $5.9 billion in revenues for the second quarter 2011. Sequentially, top-line revenues grew $600 million from $5.3 billion in the first quarteras North American completion and production revenue provided 44% of the company's total revenue flow.

The company cited improved pricing and greater equipment utilization for the gain. Furthermore, the company provided a vote of confidence in the North American oil and gas cycle through 2012.

"We have for some time expressed confidence in the strength of the North America cycle, and our results this quarter validate our positive view on the market," said Halliburton CEO Dave Lesar. "Strong crude prices, operators' improved cash flows combined with their ability to access capital, and the increasingly liquids-rich nature of the United States land market, give us continued confidence in the strength of North America through 2012."

Good news apparently comes in threes. The U.S. land market experienced an unexpected vote of confidence just last week when Australia’s BHP-Billiton announced a $15.1 cash and debt assumption offer for shale mainstay Petrohawk Corp.

Not to be outdone, the oil services team at Raymond James & Associates Inc. came out with a table pounding report extolling a "stronger for longer" North American pressure pumping market.

"The reality is that the pressure pumping market (along with complementary services such as coiled tubing) remains remarkably tight," noted J. Marshall Adkins in a piece published July 18. "Our refreshed pressure pumping model now indicates an undersupplied market into 2013 (very bullish). As a result, we expect that companies will continue to deliver stellar results that should drive meaningful EPS appreciation (25+%)."

The financial firm boosted its model on North American pressure pumping supply by 5% to 11.2 million horsepower in 2011, and from 12.3 to 14 million horsepower in 2012, a jump of 14%. Adkins now expects 2011 North American pressure pumping demand to rise 10% to 12.6 million horsepower, and to climb another 25% to 15.1 million horsepower in 2012.

Attrition of heavily worked pressure pumping equipment should consume 1 million horsepower in 2011 and 2.6 million horsepower in 2012, leaving the market undersupplied into the 2013 time frame.

The industry is setting up for a multi-year upcycle as rising demand for drilling services combines with greater intensity in frac services as the industry transitions from dry gas to liquids, according to the Raymond James report.

California Dreaming

Thanks to California's contribution, which is largely centered in Kerns County, this week's oil-directed rig count rose 32 units to 784, accounting for 51% of the 1,549 units classified as turning to the right for oil and gas targets only.

Rig float, or the number of units moving between wells, stayed constant at 186 for the week, but is down from as many as 200 units in June. Adding rig float to the active totals, plus a four-unit increase to 40 for domestic offshore drilling, brings Smith's count to 1,775, a gain of 51 units over the last week when tallying all oil and gas activity, regardless of rig status.

Domestic activity is re-gaining momentum after inclement weather and shortages of equipment and people buffeted rig count in the May/June time frame. Trucking availability has become acute in certain Midcontinent markets—particularly western Oklahoma—and the Permian Basin, slowing the rate at which rigs can move between jobs. Elsewhere flooding slowed momentum in May in the Bakken and the DJ/Powder River basins. The worst is largely behind for operators working in the Williston Basin. The flooding situation was much worse on the Canadian side of the Bakken play.

However a confluence of sell-side analysts, earnings announcements from oil services firms, and industry metrics suggest a silver lining is still ahead for an expanding domestic oil and gas market.

Current Rig Count
Type6/24/20117/1/20117/8/20117/15/2011
Gas Directional112110104113
Gas Horizontal524541534541
Gas Vertical102111111111
Gas Total (Land)738762749765
Oil Directional49546077
Oil Horizontal371387376394
Oil Vertical306315316313
Oil Total (Land)726756752784
Gas Shales329320317326
Oil/Liquid Shales343356350362
Tight Sands137150141141
Total Unconventional809826808829
Rigging Down (Land)136125128128
Rigging Up (Land)64575958
Total Rig Float (Land)200182187186
Deep6656
Shelf17161617
Inland Barge14141517
Total Offshore37363640
Drilling Offshore37363640
Drilling Onshore1,4641,5161,5011,549
Total Oil/Gas Drilling1,5011,5521,5371,589
Trends
TypeChange4-Week AverageCurrent vs. Average
Gas Directional91103.0%
Gas Horizontal75351.1%
Gas Vertical01092.1%
Gas Total (Land)167541.5%
Oil Directional176028.3%
Oil Horizontal183823.1%
Oil Vertical-33130.2%
Oil Total (Land)327553.9%
Gas Shales93230.9%
Oil/Liquid Shales123532.6%
Tight Sands0142-0.9%
Total Unconventional218181.3%
Rigging Down (Land)0129-1.0%
Rigging Up (Land)-160-2.5%
Total Rig Float (Land)-1189-1.5%
Deep164.3%
Shelf1173.0%
Inland Barge21513.3%
Total Offshore4377.4%
Drilling Offshore4370.0%
Drilling Onshore481,5082.8%
Total Oil/Gas Drilling521,5452.9%
Historical
Type3Q 104Q 101Q 112Q 11
Gas Directional125119126107
Gas Horizontal574576556541
Gas Vertical178156119104
Gas Total (Land)877851801752
Oil Directional35384549
Oil Horizontal228280325346
Oil Vertical229261317323
Oil Total (Land)492579687718
Gas Shales382377362335
Oil/Liquid Shales229276303328
Tight Sands153171162145
Total Unconventional764824827808
Rigging Down (Land) 95110120
Rigging Up (Land) 535858
Total Rig Float (Land) 148168178
Deep2005
Shelf15141313
Inland Barge10141415
Total Offshore27282733
Drilling Offshore27282734
Drilling Onshore1,3691,4321,4901,469
Total Oil/Gas Drilling1,3961,4601,5171,503

Source: Hart Energy, Smith Bits (A Schlumberger Co.)

Contact the editor, Richard Mason, at rmason@hartenergy.com.