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Analysts See U.S. Oil Rig Count Drifting Lower As Gas Slowly Recovers

The U.S. oil rig count will continue to "drift slowly lower" in 2013 and 2014 in part because of technology and in part to balance the market, according to an updated analysis by Raymond James & Associates Inc.

J. Marshall Adkins and his colleagues had predicted the oil rig count to fall by around 5% year/year, or by around 95 rigs from 2012. However, a review of data now is forecasting that the average rig count will fall by 170 this year, to average 1,749 active rigs, on three things:

"Next year, our more bearish crude price outlook leads us to establish a 2014 U.S. rig forecast of 1,650 average active rigs, which is down another nearly 6% (or 100 rigs) versus 2013," wrote Adkins. "Eventually, drilling activity needs to slow at some point in order to balance the oil market, and lower oil pricing is the mechanism to get you there." The 2014 average U.S. onshore rig count forecast now is 1,650, which would be 6% lower on average than in 2013.

For natural gas drillers, improved U.S. prices "will hold up for the next several years and drive a very slow recovery in natural gas drilling," predicted the analysts. "If oil prices fall in 2014, like we expect, the move back to gas could accelerate."

The analysts acknowledged that they had recently raised their 2013 oil price forecast because "unexpected" Saudi Arabia oil supply cuts had pushed the "oil inventory problem" into 2014. "That said, we remain much more bearish than consensus on the oil price outlook for the next 18 months. That also means that our U.S. rig forecast remains well below consensus for the next few years."

Even on Raymond James' bearish outlook over the past several months, "actual drilling activity has fallen short of even our expectations." Schlumberger Ltd. CEO Paal Kibsgaard noted the same in a speech last week, saying U.S. onshore customers were adding fewer rigs than anticipated (see Shale Daily, March 25).

Analysts noted oil-directed activity "now makes up roughly 76% of drilling activity (up from less than 15% a decade ago) because returns on oil wells at current oil prices are very attractive. Unfortunately, despite our recent upward revision for our 2013 oil price outlook, we remain relatively bearish on oil prices over the next few years."

The "Big 3" plays -- the Permian, Bakken and Eagle Ford -- "will likely represent the largest absolute decline in oil rigs, the more marginal plays such as the Midcontinent region will likely fall in the largest percentage terms. Looking outside the 14 major basins, we expect that these smaller, more mature reservoirs represent the highest breakeven and as such will likely take a greater percentage cut in drilling rig activity."

A "renewed level of excitement" is clear in the Permian Basin, and to date this year "landmark" capital expenditures (capex) plans are on view by operators, either through public markets or mergers and acquisitions, noted Adkins. "The interesting part about this flood of capital is that it might not increase the aggregate rig count as you may have expected. Why? The Permian is diving head-first into horizontal experimentation.

"Most of the large operators in the region are shifting a large amount of their Permian capex to drilling horizontal wells, which require better rigs, take longer to drill and can cost three to four times as much. While overall spending (particularly on completions) should move higher, the Permian rig count should move lower."

Raymond James expects the Permian vertical rig count to fall 45 rigs, from its current level of 278 to 234 by the end of 2013. Meanwhile, Permian horizontal activity is forecast to grow by 10 rigs, to 185 from 175. "This trend should continue in 2014 with another 35 horizontal (to 220 total horizontal)" as operators become more in tune with the play.

In addition, pad drilling "is still in early innings," but operators are moving toward it rapidly, noted the analysts. "By doing development drilling from a pad, operators significantly reduce rig moving times. By reducing moving times, pad drilling can decrease total drilling times from 10-40%, depending on well depth. That means increased wells drilled per rig (or fewer rigs per well drilled)."

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