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North American Rig Count Tumbles

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We have previously written that we thought the forecasts of oil production continuing to rise in 2015 were baloney and that rig counts and volumes would fall quicker than the ‘experts’ were predicting.  The most recent drilling rig counts seem to be playing right into our thoughts.

A massive drop in Canadian rig counts (by 135) accounts for the lions share of the drop of 170 rigs.  The U.S. had a drop of 35 rigs.  Overall this is a huge drop of 8% of rigs.  The best rig count data is put out by Baker Hughes and youcan see the data here.  It should be noted that the Canadian rig count has historically been quite volatile and we will need to see a number of weeks of data to know what is happening up north for sure.  It should also be noted that rig counts are still above year ago numbers by 3%

Here is our prediction on the rig situation and North American oil and gas production.  Rig counts will continue to drop–on average 3% per week for the next 8 weeks or so, putting counts 20-25% below last year.  Additionally many of the wells currently being drilled will not be completed. Drilling a well is only 50% of the costs of getting a well to production–the other 50% of the cost is in well completion (i.e. a typical hortizontal well costs between $7 and $10 million–a full $3.5 to $5 million is in completion).  Does it make sense to invest $5 million to complete a well today at $54/barrel oil?  Many of these companies are looking for ways to survive–to cut costs.  Yes they need new production to maintain volumes, but they will take a small production volume cut for a quarter or two.

Given the 1st year declines in most of the newer wells in the U.S. and likely reduced volumes globally because of low pricing we don’t believe that it will take long to get rid of excess production.  Globally oil production is about 1 million barrel/day beyond demand–in the U.S. we are producing 600,000 barrels/day more now than we were in June.  Globally demand is around 92 million barrels/day.  It is almost a rounding error to bring production volumes into balance with demand.  We believe we will see balance in supply/demand by June, 2015 if not sooner and that prices will react sooner – say April to this coming balance.  

The bottom line is that you should be watching for the bargains in the oil patch–we sure are.  The timing of buys may be a few weeks or months off, but right now markets have seemed to have baked in an expectation of lower prices (in the mid $40) so we should be getting closer to a buying point.

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