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Do Rig Counts Even Matter Anymore?

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The number of rigs drilling for oil and natural gas has long served as one of the most important metrics for gauging the health of the energy industry.

But recently, the usefulness of rig count data has been called into question. Specifically, commentators have noted a sizable disconnect between the number of active rigs in a play and production from that play. Let's take a closer look at why this is and whether or not rig counts are as important as they used to be.

Improvements in drilling efficiency
The disconnect between rig counts and production can largely be explained by one major factor -- drastic improvements in drilling efficiencies.

Since hydraulic fracturing and horizontal drilling methods gained widespread commercial acceptance several years ago, oil and gas producers have continued to report efficiency improvements as they optimize their techniques even further.

Pad drilling methods have become especially popular, since they allow operators to more efficiently drill multiple wells from the same pad. This has enabled numerous companies to dramatically reduce the number of days taken to drill and complete a well.

Sharp decline in drilling days
For instance, in the Bakken shale of North Dakota, Kodiak Oil & Gas (NYSE: KOG  ) reported that fourth-quarter spud to rig release days were down to the low 20s for a typical 10,000-foot lateral well -- a sharp reduction from nearly 35 days a year earlier. In fact, a recent Kodiak well completed in the fourth quarter was drilled in just 18 days -- a company record.

Pad drilling methods have also allowed operators to use fewer rigs to drill the same number of wells. For instance, Whiting Petroleum (NYSE: WLL  ) , another major Bakken operator, reported a substantial decline in drilling expenses over the past year because of a successful transition toward multi-pad drilling, allowing the company to drill the same number of wells with fewer rigs.

Similar improvements can be seen in Texas' Eagle Ford shale. In June 2012, operators in the play averaged just around 19 days to drill a horizontal well, down from an average of 23 days a year earlier. Chesapeake Energy (NYSE: CHK  ) , whose operations have focused intensely on the liquids-rich play, said it averaged just 18 days to move between Eagle Ford wells in the fourth quarter, down from 26 days two years ago. It also reported drilling a recent well in just under eight days -- a company best.  

Previously, the process of moving a drilling rig between two locations was rather cumbersome. A rig needed to be disassembled at one well site and then reassembled at the new one, even if the new site was just a few yards away. But now, using hydraulic walking or skidding systems, a rig can be lifted and transported a short distance to the new drilling location.

In fact, improved rig mobility and the introduction of pad drilling techniques have even allowed operators to transport rigs between locations that are much further apart. For instance, rig operator Nabors Industries (NYSE: NBR  ) reported moving a fully assembled rig a length of one mile between drilling locations.  

Longer time to market
Another reason the rig count data may skew the true scope of oil and gas activity has to do with the longer amount of time it takes to get output to market, or what analysts at ISI Group have termed a longer "spud-to-sales" time.

In Pennsylvania, for instance, several hundred wells have been drilled but not completed because the takeaway capacity to get their production to market simply isn't there. Several operators have been forced to drastically reduce their rig counts in the region. For instance, both EXCO Resources (NYSE: XCO  ) and Talisman Energy (NYSE: TLM  ) have just one rig each remaining in the Marcellus.

Final thoughts
Though the rig count is obviously still a very important metric, it may not be nearly as good a gauge of supply as it was in the past. As exploration and production companies see drilling costs and drilling days decline, many are opting to reduce rig counts, while still intending to bring new wells online and increase production.

For instance, Marathon Oil (NYSE: MRO  ) , which reported sizable improvements in both well costs and drilling days in the Eagle Ford, said it may reduce its rig count in the region by two this year, even though it plans to add 290 wells and boost production to 85,000 barrels of oil equivalent per day.

Chesapeake has made impressive progress in trimming its production costs, as it shifts its focus away from natural gas and toward liquids production. But will the company manage to meet its oil production target and boost cash flow? Or will Chesapeake languish under the weight of its heavy debt load? To answer that question and to learn more about Chesapeake and its enormous potential, you're invited to check out The Motley Fool's brand-new premium report on the company. Simply click here now to access your copy and, as an added bonus, you'll receive a full year of key updates and expert guidance as news continues to develop.

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Arjun Sreekumar

Arjun is a value-oriented investor focusing primarily on the oil and gas sector, with an emphasis on E&Ps and integrated majors. He also occasionally writes about the US housing market and China’s economy.

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