The land rig count has risen for three straight weeks. This raises the question of whether oil service activity in North America has bottomed for this cycle, with a recovery set for the balance of 2009 and into 2010. (For a primer on the oil industry, refer to our Oil and Gas Industry Primer.)
IN PICTURES: Digging Out Of Debt In 8 Steps
Baker Hughes (NYSE: BHI), which collects data for the industry on rigs being used, said that 948 land rigs were working in the United States in the week ending July 31. This was up five rigs from the previous week.
After looking at industry conference calls to find any confirming evidence of this turn in the cycle, I think it's fair to say that the panic laying down of rigs is probably over, and stabilization is the first step leading to a recovery.
First The Bad News
Chevron (NYSE: CVX) said during its conference call last week that it was ending all natural gas drilling in North America due to low prices.
George L. Kirkland, executive vice president, said, "I expect by the end of the year, we will not have a single gas land rig running. We are redeploying our efforts to where we can, within our ability, move equipment around and contracts around to really focus on oil in the United States. (With low) gas prices, it doesn't make sense for us right now to be drilling those gas wells."
The company did not say how many rigs it was laying down, but obviously this development is not good for the cycle. The only thing that would change Chevron's plans would be a rebound in natural gas prices before the end of 2009.
Now The Encouraging News
Helmerich & Payne (NYSE: HP), one of the largest rig operators in the U.S., has an excellent view into the cycle. Hans Helmerich, the CEO, said during the company's conference call that he was seeing "greenshoots" and that the "wholesale retreat" of its customers was over. John Lindsay, another executive at Helmerich & Payne, said later during the call that "We are encouraged by the past several weeks of discussions with customers that they may be signaling a bottom in the rig counts. Additionally, the spot market is beginning to emerge again in the U.S."
Several weeks ago Nabors Industries (NYSE: NBR) management also expressed optimism on the cycle. Eugene M. Isenberg, CEO, said "We'll see the bottom in the third quarter of this year." Isenberg is usually optimistic during conference calls, so this may not be much of a data point.
Patterson-UTI Energy (Nasdaq: PTEN) did not make any bold pronouncements on the cycle during its earnings release, but it noted having 68 rigs working as of July 30. This is up from an average of 60 rigs operating in June.
Question Of The Day
The question of whether the recent uptick in land rigs working in the U.S. is the start of a recovery or the energy equivalent of a bear market rally is the question of the day for investors. A correct answer here could prove very profitable for those taking the risk. (For additional reading, see Understanding Oil Industry Terminology.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
