Why You Don't Need to Sweat Rig Count

The U.S. rig count data, which includes the number of active rigs drilling for oil and gas and is published by oil-field services company Baker Hughes, has long been one of the most crucial gauges of the level of U.S. energy production.

But in recent years, radical improvements in drilling efficiency have rendered the metric virtually obsolete, as energy producers continue to ramp up production while employing fewer rigs. Let's take a closer look at some of the companies driving these efficiency improvements, and why the rig count data is no longer as important as it used to be in gauging the health of the U.S. energy industry.

Techniques driving drilling efficiencies
Over the past few years, energy producers have significantly improved upon the drilling techniques of hydraulic fracturing and horizontal drilling. Many have driven down well costs and slashed drilling days through techniques such as pad drilling and downspacing, which have allowed them to boost production while employing fewer rigs.

For instance, Continental Resources (NYSE: CLR  ) has managed to reduce its average completed cost per well in North Dakota's Bakken to just $8 million, down from more than $9 million just a couple of years ago, by using multiwell pads. With oil prices at $100, these cost savings have boosted Continental's rate of return from about 50% to roughly 60%.

Meanwhile, in the Eagle Ford, Marathon Oil (NYSE: MRO  ) reported a 20% year-over-year decline in both drilling times and drilling and completion costs during the third quarter, due largely to pad drilling and other efficiencies, even as the company doubled its quarterly Eagle Ford production to 81,000 net barrels per day.

Similarly, Chesapeake Energy (NYSE: CHK  ) , which is allocating the largest portion of its 2013 capital budget toward the Eagle Ford, has also seen meaningful improvements in spud-to-spud cycle times and well costs in the play thanks to cost reductions through pad drilling and other efficiencies. The company's average Eagle Ford well now costs slightly less than $7 million, down from $9 million a few years ago, while spud-to-spud cycle times have fallen from an average of 21 days to roughly 16 days.

Lastly, LINN Energy (NASDAQ: LINE  ) has also seen massive improvements in both cycle times and well costs at its Granite Wash and Hogshooter operations in Texas and Oklahoma, thanks to continued improvements in horizontal drilling and efficiencies resulting from the company's gas-gathering and water-handling facilities. LINN's average spud-to-sales time in the Granite Wash is now under 65 days, down from 88 days last year, while well costs came in at $7.9 million per well during the third quarter, down from roughly $9 million in 2012.

Disconnect between rig count and production
With so many companies using pad drilling, it shouldn't come as a surprise that the average North American active rig drilled 15% more wells during the third quarter of this year than in the first quarter of 2012, according to Baker Hughes data.

In North Dakota's Bakken shale, each rig's daily oil production from new wells is expected to nearly double this year, from slightly more than 250 barrels of oil per day last year to an estimated 496 barrels per day in December, according to the U.S. Energy Information Administration. Similarly, in Texas' Eagle Ford shale, each rig's production from new wells is projected to increase to 413 barrels per day, up from about 200 barrels per day last year.

Recognizing this sizable disconnect between the rig count and output, the EIA recently released a new report that attempts to offer a better understanding of drilling productivity across the country. This Drilling Productivity Report, which will be a monthly publication, takes into account the number of wells drilled per rig, their productivity, and depletion rates, in addition to the standard rig count measure.

The takeaway
Over the past few years, energy producers have increasingly focused on drilling efficiencies in an effort to rein in capital spending. Thanks to techniques such as pad drilling, many have been able to grow production at double-digit rates, while simultaneously reducing their rig count. Going forward, even more operators are expected to shift toward multiwall pad drilling, which should continue to drive production and efficiency improvements for the foreseeable future.

Continental, Marathon Oil, Chesapeake, and LINN are just a few of the hundreds of companies helping drive the record oil and natural gas production that's revolutionizing the United States' energy position. That's why the Motley Fool is offering a comprehensive look at three energy companies set to soar during this transformation in the energy industry. To find out which three companies are spreading their wings, check out the special free report, "3 Stocks for the American Energy Bonanza." Don't miss out on this timely opportunity; click here to access your report -- it's absolutely free.

 
 
 
 
 
 
 
 
 
 

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