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Jump in rig counts adds to evidence of oil, gas production recovery

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Jump in rig counts adds to evidence of oil, gas production recovery

The recovery in rig counts has entered its seventh month, with redeployments of oil rigs outpacing natural gas. Signals from drillers and analysts suggest that the rebound may continue.

Rig counts still rising

"[Y]ou could say that May was the trough [in rig pricing], and I think our lowest pricing was in August, and so we're starting to see some improvements," John Lindsay, president and CEO of Helmerich & Payne, said on the company's conference call Nov. 17. "But I don't think there's any doubt that for high-quality rigs and high-quality performance … there will start to become some pricing power in the market."

Helmerich & Payne has contributed to the increases in drilling productivity in recent years through improvements in rig technology such as pad drilling, AC drive, skidding systems and high-pressure mud systems.

Improvements in performance have lowered costs to the point where many exploration and production companies can drill profitably with crude oil prices below $50/bbl.

Data from Baker Hughes Inc. showed that the number of rigs deployed in the U.S. rose by 13 in the week ended Dec. 16 to reach 637. The number targeting crude oil rose by 12 to a new high for the current upward trend of 510, while natural gas rigs gained one to reach a new recovery high of 126.

The latest gain added to a string of increases that began following a bottom in the U.S. total rig count at 404 in the weeks ended May 20 and May 27. The number of rigs targeting crude oil reached a cycle low of 316 in the week ended May 27, while natural gas rigs reached a record low of 81 in the week ended Aug. 5.

The Permian Basin has been the main beneficiary of rig redeployments, where the oil rig count has increased 80%, or 109 rigs, between a trough in the week ended May 27 and the week ended Dec. 9. The Niobrara gained 85%, or 11 rigs, during that period, while the Bakken and Eagle Ford have increased 45% and 42% respectively, or 10 rigs and 11 rigs apiece.

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In shale plays where natural gas is targeted, the Marcellus region has seen the largest jump since the trough on Aug. 5, with a gain of 19 rigs, or 90%. The Haynesville rose by 11 rigs, or 73%, while the Utica gained six rigs, or 46%.

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Production on the rise

E&P companies have continued to deploy resources to the Permian basin due to the quality of the resource, a well-developed infrastructure and proximity to markets on the Gulf Coast.

Oil production there is expected to rise 1.8%, to 2.13 MMbbl/d, sequentially in January 2017, while natural gas could gain 0.9%, according to the "Drilling Productivity Report" published by the U.S. Energy Information Administration.

"Our analysis suggests that crude production in the basin is set to surge from 2.0 MMbbl/d in 2016 to 3.4 MMbbl/d in 2020 based on rig count growth, drilling efficiencies and improvements in completion design," analysts from Tudor Pickering Holt & Co. said in a note on Dec. 12. "The midstream industry appears to have enough incremental pipeline capacity in development to adequately deliver those barrels to market at least into 2020."

Rising prices may help make drilling decisions easier, especially since prices have rebounded since OPEC's announced production cuts.

A study by Wood Mackenzie published Dec. 9 suggests that the E&P industry should see improved profits in 2017.

"The industry has a good chance of achieving double digit returns in 2017," Dr. Andrew Latham, vice president of exploration at Wood Mackenzie, said. "Smarter portfolio choices and lower costs are already paying off."

Latham said the industry has cut exploration deeper than other upstream spending and that a recovery will depend on oil prices.

Wood Mackenzie expects the Brent price to rise sharply from 2019, averaging $77/bbl in real terms for the year. If that happens, then recovery in exploration spending will follow a year or two later.

Shale plays that had once been uneconomical are now being explored once again. Natural gas production in the Haynesville fell from a peak of 10.56 Bcf/d in November 2011 to 5.90 Bcf/d in March, according to the Drilling Productivity Report. It is expected to recover toward 6.02 Bcf/d in January 2017.

The Haynesville and other plays such as those in the Rockies are being termed "green shoots," as new technologies are being applied.

"Fewer, better wells promise a brighter future for explorers," Latham said.

Market prices and included industry data are current as of the time of publication and are subject to change. For more detailed market data, including power and natural gas index prices, as well as forwards and futures, visit our Commodities Pages.