More U.S. rig efficiency seen favoring oil service giants

Fri Oct 11, 2013 2:10pm EDT

(Reuters) - New data on U.S. onshore oil and gas wells on Friday underlined a trend in which oilfield services companies that perform a variety of work at drilling sites are able to secure more business despite no growth in the bellwether rig count.

Baker Hughes Inc (BHI.N), publisher of one closely watched tally of active rigs, started producing a U.S. well count index in July in response to the greater efficiency with which rigs were working.

The third-quarter numbers, out on Friday, show that 9,175 wells were drilled on land around the United States, up from 9,011 in the second quarter, even though the average rig count was unchanged at 1,709 rigs.

"Well count data supports our belief that rising rig efficiency will fuel oil service growth that exceeds changes in the rig count," said Sterne Agee analyst Stephen Gengaro, noting that the average wells drilled per rig grew by 6 percent over the past year.

Gengaro, who believed the trend played into the hands of diversified industry leaders such as Halliburton Co (HAL.N) and Schlumberger Ltd (SLB.N), highlighted the efficiency improvements in two of the hottest oil basins in the country: the West Texas-centered Permian, and North Dakota's Williston.

In the third quarter compared with the second, the Permian well count increased by 3 percent even though the rig count fell 1 percent, while the Williston well count jumped 8 percent despite a 2 percent drop in the rig tally, Baker Hughes found.

Rig efficiency will be a hot subject when Schlumberger reports third-quarter results next Friday along with Baker Hughes, while Halliburton will report on the Monday after that.

As for drilling rig contractors, they could benefit if they have invested in newer rigs capable of drilling multiple wells from one site. Nabors Industries Ltd (NBR.N), owner of the world's largest onshore rig fleet, has said about a quarter of its 472 rigs fall into that category.

Shares of Nabors are up 19 percent so far in 2013, though that compares unfavorably with 32 percent for rival Helmerich & Payne (HP.N), which has an even newer fleet of rigs deployed.

Analysts at Cowen & Co say companies focused on hydraulic fracturing will face even more pricing pressure because more efficient drillers will have even less need for their equipment - a market already over-supplied after an aggressive industry build-out in 2011 and 2012.

This week, Cowen cut its rating on C&J Energy Services Inc (CJES.N) to "market perform" from "outperform" and predicted no improvement in fracking pricing through the end of 2014.

"We believe consensus is more optimistic, expecting pricing in the frack market to materialize sometime in 2014, and for some 75-100 drilling rigs to be added in 2014," Cowen said.

As a result, the analysts said their earnings estimates for the fracking companies they follow, which also include Basic Energy Services Inc (BAS.N) and RPC Inc (RES.N), were between 5 percent and 10 percent below the Wall Street consensus.

(Reporting by Braden Reddall in San Francisco; Editing by David Gregorio)

Comments (0)
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.