Raymond James: Rig Count Up 15% in Three Months, Permit Activity High

The North American drilling rig count is off to one of its best starts in a while, up 15% since the beginning of this year, and is running counter to the year-end production spending surveys that indicated minimal spending this year, according to Raymond James Energy's latest "Stat of the Week."

"The rig count shows no signs of cooling off either, with a 16-rig increase this past week," said analyst Marshall Adkins. "Additionally, the significant increase in drilling permits in the past few months provides even more visibility that this recent rebound in the rig count is not a flash in the pan." He noted that contrary to what earlier exploration and production (E&P) budgets and investors predicted, the rig count has been going up with commodity prices.

In December, Raymond James believed that E&P spending would be up more than 20% this year, unlike the E&P spending surveys that called for flat to minimal year-over-year spending. The U.S. rig count stood at 962 rigs at the end of March, up 15% since the beginning of the year and up 26% over last year. "This 15% upward move in the rig count is especially impressive given the fact that the rig count typically declines by 10% during this time frame."

In the past three months, Adkins noted that drilling permits are up 30% for the same period a year ago. He said the gap between permitting and active rigs will not last long and that "drilling activity should continue ramping up for the foreseeable future." Adkins wrote that the only factors to prevent the rig count from increasing even more rapidly are infrastructure and labor constraints.

Because of the activity, Raymond James raised its 2003 rig forecast to 1,040 from 1,030, and established a 2004 forecast of 1,200 rigs. "Needless to say, these estimates are well above Street consensus." However, Adkins added that "all of the leading indicators are pointing in the right direction and drilling activity should rebound back near the peak levels we saw in mid-2001.

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