ANALYSIS-US drillers brace for sharp slowdown, rig shakeout
SAN FRANCISCO, Jan 2 (Reuters) - A steady decline in both energy prices and the economy last quarter will prompt even more talk this month among U.S. drillers, oilfield services companies and their investors about one number: the rig count.
The sidelining of hundreds of rigs from the market had already been deemed inevitable before the price of a barrel of oil fell below $50 and natural gas spot prices hit a 16-month low. The only question was how many rigs would have to go.
The rig count is a handy way for investors in energy companies to take the temperature of the exploration and production side of the industry.
Industry estimates a few months ago -- only weeks after North American rig numbers peaked at 2,449 in September, a 23-year high -- were for a decline of 400 to 500 rigs in 2009.
That now looks like far too shallow a trough, with analysts expecting at least 700 U.S. rigs to be "stacked" before energy prices possibly start to recover, along with the economy, late next year.
So when industry players report fourth-quarter results this month, investors will be keen to hear how their expectations for rig reductions have changed since late October, when the price of crude CLc1 was still above $60 a barrel.
"The rig count decline is not only a function of lower commodity prices but also a good indicator of how to balance to the market," said Roger Read, senior energy analyst at Natixis Bleichroeder. "The decline is part of bringing supply and demand back into balance."
The North American rig count stood at 2,352 in November, according to figures from oilfield services company Baker Hughes Inc (BHI.N). Separately compiled weekly figures showed a decline of at least another 250 or so in December.
Analysts at Pritchard Capital Partners believe they have spotted a trading opportunity in the cycle, saying land-driller shares tend to bottom out six months before rig numbers do.
On Wednesday, in a research note entitled "There Will Be Mud," the energy investment bank put "buy" ratings on Helmerich & Payne Inc (HP.N), Nabors Industries Ltd (NBR.N) and Pioneer Drilling Co (PDC.A), and all rose by about 4 percent or more.
BOTTOM LINE
Rig counts also have very real consequences for the bottom lines of oilfield services companies, not only in terms of lost revenue but also pressure on the prices they can charge.
Weatherford International Ltd (WFT.N) forecast that even a decline of just 400 rigs in North America in 2009 would knock more than 4 percentage points off its profit margins in the region, which were 26.5 percent in the third quarter.
Most U.S. rigs are targeting natural gas, and analysts at Houston-based investment firm Simmons & Co expect the number of those rigs alone would have to decline by 700, or 43 percent, from the 2008 peak in order to rebalance supply and demand.
"While a cut of this magnitude will ultimately reduce supply, it may not be sufficient to prevent gas-on-gas competition and weak prices through the 2009 injection period," Simmons said in a recent note, anticipating a rig count bounce-back later in the year if the economy recovers too. Continued...
