Rigs on the Rebound

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At a time when the oil services industry is in such great flux, I've come to find Patterson-UTI's (Nasdaq: PTEN) monthly operating updates invaluable. Two months ago, the data told me to dodge the land drillers. So, what does the picture look like now that the March numbers are in?

Here's the updated data with the past two months' reported numbers:

Month	Rigs Operating	Sequential Monthly Change (%)
October 2008	283	n/a
November 2008	261	(7.8)
December 2008	213	(18.4)
January 2009	162	(23.9)
February 2009	128	(21)
March 2009	92	(28.1)

Data from company press releases.

Yikes! Just when things looked like they might be settling down in February, March blows in with the steepest sequential decline yet. Even after isolating the effects of spring breakup in Canada (picture soft, muddy roads rather than wild, drunken coeds), Patterson's rig count decline still accelerated in March, with active U.S. rigs down 25% versus negative 21.1% in February.

Despite these declines, you've probably noticed that the shares of Patterson, Nabors Industries (NYSE: NBR), Helmerich & Payne (NYSE: HP), and the rest of the land drillers have all recovered significantly from their recent lows. Union Drilling (Nasdaq: UDRL), whose leverage to Appalachia benefits from the increasing activity of firms like Range Resources (NYSE: RRC) and Atlas Energy Resources (NYSE: ATN) in the Marcellus shale, has even doubled over the past month or so.

The market, as I'm sure you've heard time and time again, is a forward-looking mechanism. Looking at periods like October 2007, I'm tempted to say that the track record is better when it comes to anticipating economic recoveries, rather than disasters.

Mr. Market has spoken: The cycle should hit bottom within the next few months. You'd never know it from the natural gas strip (the 12-month average futures price), which the EIA recently reported at $4.74 per million BTUs. You currently have to look all the way out to December 2011 to find a natural gas futures price over $7.

It's true that oil has found some legs lately, but our domestic onshore drilling market is heavily gas-levered, with natural gas-directed rigs outnumbering oil-directed rigs by roughly four to one. Based on my observations of capital spending cuts, forced fire sales, dreary industrial demand, bank scrutiny of borrowing bases, and totally unresponsive gas prices, I have a hard time seeing improvement for the domestic drillers in 2009. Then again, these stocks may have been so oversold that they had to bounce just to price in non-failure in 2009 and a recovery in 2010, which seems to be the more likely scenario.