Wednesday, April 22, 2009

The Rig Count Cliff

As the drilling rig count continues to slide off a cliff, I noticed a graphic in the Wall Street Journal that said it all (and showed the falloff literally, if not purposefully, as a cliff).

This image says it all. Rig counts in U.S. dropped to 975, down 30 from last week and 852 from this time last year, the first time the number has been below 1,000 since 2003. The good news is that the rig count in north Louisiana was unchanged and is actually up four this week to 75. The news is less positive for the 6th district of Texas, which encompasses the Haynesville Shale. There the rig count dropped by four to 66 rigs. That number is down eight rigs from two weeks ago.

What’s most telling is how steep the drop-off is. Rigs are dropping so fast, Chicken Little has to be nervous. What it really tells me is that there will be a sharp drop in supply, especially in natural gas, in the next 6-9 months (unless, of course, LNG floods the market as some predict), which should lead to a commodity price increase. When prices do pick up, there is going to be a mad scramble to restart rigs and assemble crews. It’s going to be chaos and it will likely set the proverbial stage for another boom-bust drilling cycle. Remember the old on the bumper sticker, “Please God, Just Give Me Just One More Oil Boom. I Promise Not to Blow it Next Time”? Yeah, right. Just like semiconductors, oil and gas is a highly cyclical industry that is dangerous for investors.

On top of this news, Halliburton, which had hoped to prevent any layoffs, ended up cutting 2,000 jobs, or 12% of its North American work force.

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