Avoid Onshore Drillers As Rig Count Declines

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Includes: HP, NBR, PDS, PTEN
by: Disruptive Investor

Summary

The rig count in the US and Canada continue to decline and I expect the operating rig decline to accelerate in the coming weeks.

Decline in onshore based drilling rigs is negative for all onshore drillers and I expect these companies to under-perform in the first half of 2015.

US rig count has been more resilient as compared to Canada, but with oil prices touching new lows, I expect oil and gas companies to significantly revise their 2015 spending.

The latest rig count data from Baker Hughes comes as no surprise with continued decline in rig count in the US and Canada. This article discusses the rig count trend in the recent past, the trend likely over the next few quarters and the investment implications.

For the week ended January 2, 2015, US rig count declined to 1,811. In the last one month, US rig count has declined by 109 rigs and I expect this downward trend to continue in the first half of 2015. It might be too early to talk about the second half of the year, but the first half of 2015 will be bearish in terms of rig count.

For the week ended January 2, 2015, Canada rig count declined to 208. In the last one month, Canada rig count has declined by 2014 rigs and I expect the downtrend in rig count to continue for Canada as well.

As oil prices have slumped recently, I believe that US rig count decline will accelerate in the coming months. In the last one month, US rig count has still been resilient. However, I believe that the decline will be steeper in the coming weeks as more companies revise their spending outlook for 2015. Several companies have already slashed their investment budget for the year.

The most obvious reason for rig count decline is lower oil prices with crude (WTI) and crude (Brent) trading at $50.2 and $53.3 per barrel respectively.

The important point is that there is no immediate recovery in sight for crude oil. As oil sustains at lower levels, it is entirely likely that companies will revise their investment plans.

  • The first reason for oil to sustain at lower levels is the current supply glut, which seems to be increasing with Russia and Iraq boosting their output.
  • The second reason for oil to sustain at lower levels is the global economic weakness (particularly Euro zone and China) that is lowering demand.
  • The third reason for oil to sustain at lower levels is a stronger dollar and as the US economy remains resilient, the dollar will remain strong. Further stimulus in the Euro zone can take the dollar index higher.

With these factors of high supply, weakening demand and a strong dollar, it is entirely likely that oil will remain at lower levels.

While it is impossible to predict a bottom, I believe that $50 to $70 might be the range for 2015 with oil likely to trade at the lower end of the range for the first half of 2015.

The oil and gas companies have suffered due to lower oil prices and I believe that investors also need to avoid land based rig drillers in 2015.

I wrote an article recently on Precision Drilling (NYSE:PDS) with the company having rigs in US as well as Canada and the stock slumped by 9.44% in yesterday's trade as the bearish numbers for rig count was announced.

I expect a similar bearish move for all land based drillers and the bearish outlook will sustain for at least the first half of 2015. I am not commenting on the second half of the year as it is too early to talk about a medium-term trend in a market that is constantly bombarded with strong asset price movement triggering news.

In line with my outlook for the first half of 2015 for onshore drillers, Nabors Industries (NYSE:NBR), Patterson-UTI Energy (NASDAQ:PTEN) and Helmerich & Payne (NYSE:HP) are the other names that will suffer due to declining rig count in US and Canada.

Lower utilization, lower day rates and idle rig will not only have an impact on revenue, but also on the EBITDA margin for these companies in the coming quarters.

In conclusion, the decline in rig count will continue in the first half of 2015 and investors need to avoid the names mentioned in the article for the next 2 quarters.

While the oil supply factor remains dominant, my biggest concern is the extent of global economic slowdown in the coming quarters. Lower oil prices also mean that Russia is likely to be in recession and Middle-East growth is likely to suffer besides the known slowdown in the Euro zone and China.

It still remains to be seen if things are headed towards a global recession in 2015.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.