As Reported in the June 30th RADAR Report
Over three-quarters of all US drilling activity conducted on land entails horizontal drilling. For the most recent observations, 289 of the 381 active rigs were drilling horizontal wells. The mixes of horizontal wells in our weekly counts have held above 70% of all land drilling activity since mid-2014. So it only stands to reason that permitting activity has and will continue to be a reliable near-term leading indicator of future horizontal drilling endeavors.
You can see the strong relationship between total US permits approved weekly (on a 4-week moving average basis) and the US horizontal rig count in our first chart at the top of this page. Specifically, the correlation between the two is 93% directly, improving to nearly 97% when adjusted for a 2-month lag where drilling activity is dependent on an approved permit.
When we home in on year-to-date permitting activity, it becomes apparent that permitting activity improved, since the trough in overall US permitting—occurring in late March to early April—preceded the trough in the US horizontal rig count, wherein May 20th marked a low of 246 rigs drilling horizontal wells. May 20th also marked a low for the total US land rig count at 335 active rigs. Some quick math illustrates that nearly all of the improvement in the total US land rig count since marking the low in May has been due to greater horizontal activity (i.e., 43 of the 46- rig improvement).
Year-to-date, there have been a little over 9,200 permits approved—about one-half the number approved through the same corresponding period of 2015 (i.e., 18,100 approved during the first 26 weeks last year). Before the British referendum vote concluded, the trend in approved permits had already begun to wane—meaning permits were slowing even prior to the recent slump in oil prices that came in reaction to the UK deciding to leave the EU. Should the strong relationship between permits and horizontal drilling in the US remain in place, then this would suggest a slight reduction in the rig count from current levels is likely over the weeks ahead (most likely around August).
Ultimately, most industry-watchers (including us) believe that oilfield service activities, more specifically contract drilling, are nearing the cusp of a rebound domestically. Unfortunately, the next few months appear more destined to mark the end of this downturn rather than a continuation of the surge that started with improving rig counts in May.
So far, the pullback in permits has been relatively muted, falling by -11% since topping out during the week ending May 27, 2016. However, some key regions have seen a stronger than average decline in permitting activity, including Appalachia and the Permian Basin. Conversely, permitting activity in the Anadarko Basin has continued to improve over recent weeks. We have included a table of recent permitting trends and extrapolated what these permitting conditions would imply for the rig count. The bottom line: Do not be surprised if the rig count is not much different than today come mid-August.
