The rotary rig count has arrested its precipitous decline. File this one under "Hurray for Capitalism". There has been quite a bit of consternation about falling oil production in the United States brought forth by the pandemic lockdown/decline in demand. Since 1944, oil services company Baker Hughes has published a weekly count of the machinery, called rotary rigs, that are actively drilling for oil in this country. The latest reading on July 24th indicated that the quantity of operating equipment in the field has stabilized. This U.S. rig count is very closely tied to the price per barrel of West Texas Intermediate (WTI) sweet crude oil. When oil prices begin a significant decline, companies begin to shut down unprofitable oil wells. Many times these wells are financed by speculative-grade debt. Prolonged shutdowns can lead to financial troubles. We have seen a few bankruptcies of highly leveraged energy companies this summer highlighted by the fracking company Chesapeake Energy. This situation is not all bad. As we can see in the chart below, there was a major decline in the number of rigs operating during the 2015-2016 oil price downturn. This led to a spate of bankruptcies as well; however, the energy exploration sector rebounded quite nicely from 2016-2019. Sometimes weakness in a sector clears out the most sickly players and allows fresher, stronger competitors to come in and take control of the situation.
The energy exploration sector is prone to boom and bust cycles and is not for the faint of heart. With oil prices beginning to rebound, we will most likely begin to see some increase in active rigs again. The rise should be slow as energy demand is definitely down in the US, and oil prices are currently being held down via output cuts rather than pure market forces. It remains to be seen if the oil demand will get back to pre-lockdown levels, but this is an industry that tends to rebound. The industry may be smaller in the future, but hopefully on better footing from a lowered leverage standpoint.