Even as energy executives were trying to adjust to multiple shock waves set off by the US' $700 billion bailout of its banking system and economic turmoil last month, E&P operators were out drilling up a storm in the nation's oil and gas fields.

In mid-October, the week after the Dow Jones index dropped for the first time in years to the 8,500 range and caused many E&P companies to lower projected 2009 capital expenses amid recession fears, the US rig count was still preening at a 23-year peak.

Analysts say the disconnect between buzzing activity and tumbling financial markets is that the former simply has not caught up to the realities of the latter, although drilling is widely expected to moderate next year.

A more accurate reflection of today's economy and lower commodity prices "might take a while to turn up in the actual drilling statistics," Paul Horsnell, head of commodities research for Barclays Capital, said.

The US rig count hit 2,085 for the week ended October 17, the highest since 1985, according to the weekly Smith Bits rig count. By far, the bulk of this was land rigs, which the same week totaled 2,032. However, it has since dropped and last week stood at a total 2,037 rigs, including 1,983 rigs on land, Smith Bits data show.

During a parade of earnings conference calls since the rig count peaked, drillers -- particularly onshore which is hypersensitive to falling natural gas prices -- reported seeing little drop-off in business. But they expect this to occur in 2009, based on the growing number of E&P companies which have signaled they will cut back on rigs.

For instance, big shale player Chesapeake Energy said it will shave 30 rigs off its onshore count by year-end; peer EOG said it has dropped nine rigs. And a third large onshore operator, Pioneer Natural Resources, said it would reduce its rig activity by about 60%.

Also, land contract driller Nabors Industries said it will idle 16 or 17 rigs, but these are lower-end rigs that company CEO Gene Isenberg said Nabors will "cannibalize" for parts.

"We feel like we need to operate as if we are in a $60/barrel oil and $6/Mcf gas environment," Pioneer CEO Scott Sheffield said during a recent conference call. "It may last for several months."

Analysts and drilling executives widely believe that based on an average 15% to 25% cutback so far in projected E&P capital budgets for 2009 from earlier amounts, an activity retrenchment of 200 to 500 rigs is in store next year, or about 10% to 25% of the recent peak count.

"It's hard to argue a cut of that size won't have an impact on our industry," Richard Mason, publisher of the Land Rig Newsletter said during a recent Pritchard Capital Partners conference call.

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Despite this, analysts and land drillers are sanguine that the projected tumult of the economy will not devastate the industry.

For one thing, upstream companies paid hefty prices for acreage in lucrative shale plays in recent years, fueled by fears of being shut out of the choicest lands, and now must drill it or face lease expirations. This will drive a large chunk of continued land drilling, Nabors CEO Gene Isenberg said in a conference call.

"I don't think guys are going to spend these kind of dollars (on properties) and fuss about converting them to cash," he said.

In addition, Mason noted that while bid volume is declining for land rigs, it is unclear how much of this is seasonally oriented.

He said one promising sign is that smaller, privately held upstream players -- many of whom are more oil- than gas-driven -- are still lining up rigs for their 2009 work programs.

"The fact there's still a lot of interest on their part seems to suggest that oil prices haven't gone so low as to completely destroy incentive," he said.

Mason also noted that since land rigs have become more efficient and can drill more wells in less time, no one really knows just how many rigs are needed to maintain or grow production.

"What we've seen lately is that the rig count can go down, and production continues to go up," he said. "It's not so much a result of what the rig does, but more what operators are able to do once in the well."

Meanwhile, credit is widely deemed to be tightening, sparking fears that some operators may not obtain money for drilling. Mark Siegel, chairman of big land driller Patterson-UTI said this may not be a problem for energy companies borrowing from smaller regional banks with legacies of lending to the energy industry. Such institutions are "very different from commercial money center banks which are finding themselves in a very different situation," he said.

In addition, several drilling CEOs noted during their quarterly calls that the less upstream companies drill, the less natural gas will be available some months down the road, and this will eventually drive up the price of gas and spur more drilling. "It's self-correcting," said Bronco Drilling CEO Frank Harrison.

Created: November 11, 2008