Why the U.S. Oil and Gas Rig Count Jumped

Last week, the number of U.S. rigs drilling for oil and natural gas jumped to the highest level in nearly two months, as producers ramped up drilling in states like Texas and Louisiana.

According to data from oil-field services firm Baker Hughes (NYSE: BHI  ) , the oil rig count increased by 10 to 1,372, while the gas-directed count edged up by two to 378.

Meanwhile, U.S. stockpiles of natural gas grew by 101 billion cubic feet last week to 3.487 trillion, while oil production continued to march toward a 24-year high, gaining 7,000 barrels a day to 7.78 million for the week ended September 27, according to the EIA.

Texas driving the rig count
Texas, home to the prolific Permian Basin and Eagle Ford shale, accounts for much of the growth in the nation's rig count. These two liquids-rich plays, which together represent the vast majority of rigs operating in the state, have seen tremendous growth in oil production over the past few years, as energy producers have become more efficient in coaxing oil and gas from shale deposits.

In June, Eagle Ford oil output jumped 60% year over year to more than 621,000 barrels per day, led by sharp output increases from leading producers such as EOG Resources (NYSE: CHK  ) and ConocoPhillips (NYSE: COP  ) . ConocoPhillips reported pumping roughly 121,000 barrels per day from the play during the second quarter, roughly double its production from a year earlier, while EOG, the Eagle Ford's leading producer, said it produced a whopping 173,000 barrels of oil equivalent per day during the quarter, while simultaneously decreasing both well costs and the average number of drilling days.

Energy producers are seeing similar success in the Permian Basin of West Texas, where advanced oil recovery techniques are yielding massive quantities of oil. Devon Energy (NYSE: DVN  ) , which boasts an enviable 1.3 million net acres in the legacy oil play, grew its Permian production by an impressive 32% year over year during the second quarter and expects the play to drive much of its production growth going forward.

The rig count in perspective
Despite last week's jump, however, the U.S. oil and gas rig count has fallen by seven this year as energy producers have severely curtailed gas drilling while also reducing drilling times and expenses through incremental technological improvements.

Indeed, a handful of major energy producers have dramatically slashed their drilling and completions capital expenditures in an effort to boost earnings and cash flows and shore up their balance sheets. Oklahoma City-based energy producer Chesapeake Energy (NYSE: CHK  ) is perhaps the best example.

The company expects to spend just $7.2 billion this year, down nearly 50% from last year, as it moves toward its overarching goals of financial discipline and capital efficiency. Once an aggressive explorer, Chesapeake has slashed its rig count in half from two years ago.

The bottom line
The main takeaway from the most recent rig count data is that companies continue to do more with less -- growing production while also driving down costs and reducing the number of days it takes to drill and complete a well. Many are using techniques such as pad drilling, which allows them to drill the same number of wells with fewer rigs.

Going forward, analysts expect only moderate growth in the U.S. rig count for the remainder of this year, even as domestic oil and gas production is projected to remain strong. But as some of the above-mentioned companies continue to charge ahead in plays such as the Wolfcamp formation in the Permian Basin, rig counts in Texas will probably continue to edge higher.

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