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Rigs Return

Historically this time of year brings Q3 earnings, and with those announcements analysts begin to turn their focus from the remainder of the current calendar year to the year ahead. The year 2020 has been a year of extreme volatility in the oil sector, and most in the industry are looking forward to a return to more “normal” operations.  One indicator often focused on through the boom and bust cycles is the rig count.  The rig count has risen in recent weeks, and producers are discussing when and how they might put new rigs to work in the year ahead.  Today’s commentary will dig into the relevancy of rig count as an indicator and why a rig in the field today has different implications to future production than a rig in previous years.

Production comes from wells.  Wells are drilled by rigs.  So rigs should be an indicator of production, right?  Unfortunately, it’s not quite that easy.  The chart below begins to introduce some of the nuance.  The relationship between rigs and wells drilled makes sense.  However, after a well is drilled it still must be completed and turned to sales.  Plotting the number of wells turned to sale (and therefore contributing production) each month versus the number of wells drilled each month shows that there have been sustained periods in history where wells drilled exceeds wells to sale and vice versa.  Typically wells drilled exceeds wells to sale in periods of rising or higher prices and wells to sale exceeds wells drilled when producers are conserving capital or trying to time the market to achieve better pricing.  Wells that have been drilled but have not been completed are called DUCs.  We have written on DUCs extensively over the years (Read it all here), and they are a very important variable in forecasting 2021 production that shouldn’t be overlooked.

Another variable to consider is that the dimensions of horizontal wells have changed through time.  The chart below has the same rig and wells drilled data series, but adds the number of lateral feet drilled monthly to the comparison.  This shows that even though the number of wells and rigs hasn’t approached the peaks of 2014 in recent years, the number of drilled feet has.

Examining this data another way shows that lateral feet drilled per rig has climbed even as wells drilled per rig has steadied.

Coming full circle back to production, if we simply compare new production brought online each year to the average rig count over the year we see that the relationship between rigs and production demonstrates improved productivity through time, but also some disconnects in periods of market volatility.

What does this mean as we watch the rig count?  In times of market volatility, rigs are probably better indicators of producer confidence than of near term production. 

Want BTU Analytics’ easy-to-digest forecast of rigs, wells, production, DUCs and the factors driving the forecast?  Request a trial of our Upstream Outlook data and services by filling out the form and putting “USO TRIAL” in the message.

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Kathryn Downey Miller is the SVP, Senior Director Research & Insights at FactSet, having joined the company through the acquisition of her firm BTU Analytics in July 2021. Prior to acquisition, Kathryn was President of BTU Analytics, a provider of analytics and market data in the North American renewables, power, oil and natural gas sectors. Before BTU Analytics, Kathryn built market expertise in a diverse set of prior industry roles, including buyside investment research at an energy focused hedge fund, energy market fundamentals consulting at Bentek Energy, investor relations strategy consulting for E&P companies and investment banking at Citigroup. She speaks frequently at industry events on North American energy markets and is a CFA charterholder.

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