Focusing on rig counts to try to determine the velocity of future oil production is a fool’s pursuit.
Sure, they’re a good measure during boom times. But during busts, seasoned investors know that only looking at the number of rigs doesn’t give them the whole picture.
Just check out the most current numbers from the oil and gas patch: Rig counts are down for both! The number of oil rigs has dropped more than 30% in the past six months. Natural gas rig numbers have dropped by more than 70% in the past decade.
Yet the United States is producing more oil and more natural gas than at any other time in the past four decades.
Rig counts still matter, but they’re a poor indicator of future production. Here are three key indicators you should use instead…
Future Production Indicator #1: Location. This isn’t just important when looking for a house or starting up a retail business… Shale production in the United States has a specific location profile, as well.
The most prolific oil and gas shale production regions in the country are located in seven locations:
- The Bakken in North Dakota
- The Eagle Ford in Texas
- Haynesville in Texas and Louisiana
- The Marcellus Shale region, stretching from West Virginia to New York
- The Permian Basin in Texas and Oklahoma
- Utica in Ohio
- The Niobrara Formation in Northeastern Colorado and parts of Wyoming, Nebraska, and Kansas
These plays produce more oil and gas with lower rig usage than other shale production locations.
Future Production Indicator #2: Technology. On top of location, technology and efficiency have come a long way in the past few years, further throwing off the meaning of rig counts.
Companies like Pioneer Natural Resources (PXD) are using more sand in their fracking process and extracting up to 30% more oil from their wells, as a result.
Producers who espouse better technology will also use fewer rigs during down times, focusing instead on producing more oil per completed well.
Future Production Indicator #3: Well Completions. Perhaps the most important number to focus on during a slump is the rate of completions.
While certain companies are locked into contracts that are forcing them to drill a certain number of wells, others – like EOG Resources (EOG) – are delaying completions of wells that are already drilled.
Why? Well, by delaying completions, companies can defer cost outlays and take advantage of possible higher prices in the future. Conventional wells use up capital on the front end for drilling and pumping. Shale plays, on the other hand, use up greater capital when the wells are actually fractured because materials must be purchased for the fracturing process.
Thus, delaying completions are a real and significant option during tough times.
The problem is, these delays also create a slowdown in future production.
Keep Your Focus
As investors, your focus should remain squarely on companies like EOG, Pioneer, and larger, better-capitalized plays. These companies will be able to shift production, or delay it outright, until the markets improve.
When considering the macro-oil-production picture, investors should focus on well completions and completion rates. Let the less-informed talking heads on television and the like focus on things like rig counts alone.
And the chase continues,