US' Permian oil rig count keeps climbing as analysts await activity pickup

Permian count highest since December
Diet of 'low-calorie' rigs not satisfying
Larger companies could speed momentum

US oil rigs rose by three to 204 in the Permian Basin last week, as analysts watched all corners of industry for signs of an activity pickup next year.

The 204 rigs now working in the West Texas/New Mexico basin represents the highest number since last December, Baker Hughes said in its weekly rig count Friday. Total US oil rigs increased by seven to 425.

The 72 rigs added to the Permian by industry since late April has largely occurred at oil prices below $50/b. But it could take higher oil prices to push on to the next major sustained activity increase in that region as larger operators accelerate the momentum begun by their smaller counterparts, Paul Horsnell, head of commodities research for Standard Chartered Bank, said.

"The pace of the upwards move looks a bit more sluggish than it was six or so weeks back, so the question is what gets [the Permian rig count] to 250 or 300?" Horsnell said.

"I think that we might be getting pretty close to as far as it can rise at $45" oil prices, he added, since larger operators are insistent about not wanting to grow output at current price levels.

On Friday, NYMEX crude futures settled up 41 cents at $48.24/b. Oil prices have bounced in the $40s/b, generally the mid-$40s, for nearly six months.

For many of the smaller private Permian operators, the recent choice was to "run no rigs or run one," Horsnell said.

Earlier in the year when oil prices were $30/b or even slightly less, those operators "went for zero [and] now they are back to one," he said. But they "probably don't want to go to two yet."

However, a level of rigs around 200 "isn't bad," he added, since the number of oil rigs needed to sustain current basin crude production of around 1.9 million b/d is about 156.

EXPECT MONTHLY OUTPUT RISE

"Output should still increase month on month at current drilling levels," Horsnell said.

That view has been echoed by many, most notably by the US Energy Information Administration, which recently predicted October Permian oil production to rise by 22,000 b/d to 1.999 million b/d, a substantial monthly increase from an estimated 3,000 b/d in September.

Analysts generally agree that large exploration-and-production companies are beginning to get more active on the US drilling front, even though to date the bulk of the 109 oil rigs that have been added to the US working fleet from the early May trough of 316 has been from private and smaller operators.

The type of rigs leased by smaller companies so far have generally been what Credit Suisse analyst Jim Wicklund, in a Friday investor note, called "low-calorie rigs" -- that is, lower-specification and often vertical.

But over the past month, the 28 land rigs that have gone back to work, including 19 oil rigs, are largely high-specification horizontal rigs, Wicklund said, adding this trend should continue, "but at a slow pace."

Wicklund and other analysts expect more large-cap operators to jump into the fray with more rigs over the next few quarters.

Some of the US' biggest shale-oriented independents, including EOG Resources, Devon Energy and Pioneer Natural Resources, have all indicated they will add multiple rigs either later this year or early next year in the hottest basins, including the Permian and the STACK/SCOOP plays in Oklahoma.

Wells Fargo oil services analyst Jud Bailey said his team's recent meetings with service companies also suggest that inquiries by larger operators about adding rigs have risen over the last month and have equally come from majors and large independents as smaller privates.

Moreover, activity outside the Permian Basin is "showing faint signs of life," Bailey said in a Thursday investor note.

His statement was confirmed in this week's rig count, with the Williston Basin of North Dakota and Montana -- home to the Bakken Shale -- gaining two rigs to 30 and the Cana Woodford play in Oklahoma also up by two to 35.

In addition, the DJ-Niobrara Basin in Colorado and the Granite Wash play spanning Texas and Oklahoma each added a rig this week, making 17 rigs and 10 rigs working in those basins, respectively.

"It is ... a healthy sign that more operators are coming back into the market in other basins" besides the Permian, Bailey said.

--Starr Spencer, starr.spencer@spglobal.com

--Edited by Annie Siebert, ann.siebert@spglobal.com