Why The Rig Count No Longer Matters

Todays top stocks to buyOnce the chief benchmark for measuring the health of the oil & gas industry, the drill rig count is losing its key status. Here are some stocks to buy that benefit from the change…

1,606. Remember that number… as we’ll likely never see it again.

That was the amount of natural gas-directed rigs that were operating in the US during the week of September 12, 2008 – the highest on record, according to Baker Hughes.

This past June, the count fell to an 18-year low of 349 rigs.

Yet while the number of rigs has plummeted, gas production levels have not.

And lately, the correlation between oil wells and oil supplies haven’t fared much better.Todays top stocks to buy

Since August 2012, we’ve seen oil production rise steadily to hit a 21-year high in April while the number of oil wells have fallen to its lowest level in over a year.

If the gap continues to widen, you can bet that the importance of the oilrig count will also need to be called into question. After all, with such discrepancies does counting the number of rigs drilling matter anymore?

Furthermore, if rig counts no longer indicate the health of the industry, how can investors better gauge the future of the energy sector?

Well for starters, it’s a good idea to understand what has contributed to this disconnect.

Demand fluctuations notwithstanding, most of us are well aware that the time it takes to bring product to market is increasing.

Termed “spud-to-sales” by ISI Group’s oil & gas research crew, the process is being hampered by the fact that production is outstripping transportation and pipeline capacity.

The current infrastructure being utilized to move oil and gas supplies has not kept up with the incredible volume of fuel being produced.

“Bottlenecks are occurring at all levels,” said Lynn Helms, director of the North Dakota Department of Mineral Resources (DMR), citing problems with the lack of smaller pipelines gathering fuel at well sites, as well as larger interstate transmission pipes reaching their limits.

Despite these bottlenecks, hundreds of wells have and are still being drilled.

But the limited takeaway capacity has forced operators to pare down their active rig counts — skewing the ratio in the process.

EXCO Resources and Talisman Energy, for example, each have just one rig operating in the Marcellus shale.

Doing More with Less

But perhaps an even more significant factor affecting the rig count has been the huge advancements in drilling efficiencies.

As I’ve mentioned repeatedly, hydraulic fracturing has opened the floodgates to record fuel extraction.

But even within the practice itself, drilling techniques have improved dramatically.

One of the biggest developments we’ve seen is what’s called “pad drilling”.

In the past, drilling just two wells required rigging down, transporting the structure to a new location, and rigging it back up – even if the new target was just a stone’s throw away.

Not only was this practice time-consuming, but also costly.

Nowadays, a rig can easily be shifted to a new location without the need for disassembling – allowing rig operators to efficiently drill multiple wells in a single site.Todays top stocks to buy

Nabor Industries’ (NBR:NYSE) second generation Pace X platform, for example, has a built-in walking system capable of moving the rig 30 inches in 90 seconds, allowing a full well-to-well move to be completed in as little as one hour.

With such advances being adopted by the industry, investors may instead want to consider looking at total well counts versus the actual rig count.

The American Petroleum Institute publishes a quarterly well completion report.

With oil production on the rise, the number of oil well completions has also seen an increase.

Conversely, with natural gas output slipping slightly from their 2012 peak, so has the number of gas well completions.

But that data alone may not be enough.

You see, another major development in fuel production has been the advent of “multi-stage fracking”.

In a nutshell, this technology has enabled drillers to get more oil and gas out of each well through more stages of hydraulic fracturing.

Just a few years ago, the norm was around four stages.

Now, it’s not unusual to see 30 or more fracking stages from a single wellbore.

Companies like NCS Energy Services and Packers Plus Energy Services even have systems capable of providing between 50 and 60 stages through a single well.

In essence, the ability to track the number of frac stages could be a more indicative measure of where the oil and gas sector is headed.

At the present time, an official frac stage count doesn’t exist.

However, multi-stage fracturing is becoming more and more commonplace as companies seek to bring down costs and increase efficiency. So we could soon see such a metric created.

To wrap it all up, the drill count metric was once a reliable crystal ball as to where future oil and gas production was going. It’s not anymore.

So what are some of the best stocks to buy in light of this?

Best Stocks to Buy Now:

The aforementioned NCS Energy Services and Packers Plus Energy Services are private companies, so unfortunately they’re not an option (but I wouldn’t be surprised to see a major acquire them).

Nabor Industries’ (NBR:NYSE) is worthy of “best stocks to buy” status because of its unique Pace X platform.

And let’s not forget wastewater cleaning companies I talked about in a previous article.  As fracking counts rise, the demand for companies like GreenHunter Resources (GRH:NYSE) and Nuverra (NES:NYSE) will also rise.  These two are near the top of my list of today’s best stocks to buy today.

Yours in profits,
Todays top stocks to buy
John Holt
for Top Stock Millionaire
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