Oil drillers dig for the bottom for rig counts

By Jessica Resnick-Ault
NEW YORK, May 6 (Reuters) - For the past year and a half, a
chart of the number of U.S. oil rigs in operation has resembled
a death-defying ski slope - but it may be time to get back on
the chair lift.
The U.S. rig count may finally be bottoming out as U.S. oil
companies look for oil prices to rally just a bit more, a signal
that the time has come to deploy more capital and get production
moving again, analysts say.
The number of active oil rigs in the U.S. has fallen for six
weeks, and was at a seven-year low as of April 29, according to
data from oil service company Baker Hughes. The latest data will
be released on Friday at 1 p.m. EDT (1700 GMT). Some believe the
rig count will start to rise, as drillers plan to ramp up
production if benchmark U.S. crude reaches the trigger level of
$50 a barrel. U.S. crude prices CLc1 hit a year-to-date high
of $46.78 last week.
In the past two weeks, oil producers including Anadarko
Petroleum Corp APC.N and Pioneer Natural Resources PXD.N
have cited an improving outlook for oil prices, executives said
on calls discussing earnings. Dave Lesar, chief executive of
oilfield services provider Halliburton (NYSE:HAL) Co HAL.N , said he
believes the rig count has hit a bottom and likely will rise
this year.
The U.S. rig count generally reacts to prices with a three
or four-month lag, so following the nadir for crude in February,
it should bottom in the next month, Morgan Stanley's head of
energy commodity research Adam Longson said in a report this
week.
"The same analysis also suggests a notable increase in rig
activity may be ahead - potentially reversing much of the
decline over the past several months," he wrote.
Some companies are already resuming drilling on wells that
had been put on hold, known as drilled-uncompleted projects, and
planning to drill new wells.
"Our estimates are that at $45-$50 WTI some of the light
tight oil goes into production," said Mark Routt, Chief
economist in the Americas for KBC Advanced Technologies,
referring to a technical name for the type of oil in shale
formations. "When you have the front of the market lift, as it
has done, it makes it that much easier to justify coming back
on."
U.S. crude prices, after hitting their year-to-date high on
April 29, have gained support from output disruptions in Canada
during the past week, indicating that the market is becoming
more responsive to fundamental supply concerns that have often
failed to elicit a price response during the rout.
Companies are expected to be cautious as they redeploy rigs,
so the count will not rapidly accelerate and blunt the impact of
the increase in crude prices.
The current count of 332 rigs is unlikely to surge back to
the 668 seen a year ago, to say nothing of 2014's peak north of
1,600 rigs.
Exploration and production companies have planned for
capital expenditures at about half of last-year's levels. If
companies stay consistent with this guidance, the rig count
should remain fairly flat, said Bob Brackett, a senior research
analyst at Sanford Bernstein in New York.
Brackett cited an analysis of drilling data from Texas
showing a six-month lag between the time when rigs are deployed
and when the well pad hits peak production. So even as rig
counts increase slightly, "we still see a six-month lag with
supply response," Brackett said.
Companies also are likely to be highly selective in which
rigs they deploy as they increase drilling operations, said
Fadel Gheit, senior energy strategist at Oppenheimer & Co.
Companies are likely to only drill top wells as they will be
wary that prices could decline again, he said.
"It's easier to cut than to redeploy," said Gheit. "The
companies have very little wiggle room, there is no room for
error. You miss you're dead."