The great demise of the U.S. rig count continued Feb. 12 with another 30 rigs down from the previous week, and production indicators showed declines in oil and gas for at least the next several months.

The U.S. rig count stood at 541, down 817 rigs from February 2015, including 617 oil rigs and 198 gas rigs, according to the Baker Hughes Inc. (NYSE: BHI) rig count. The reductions could partly be due to E&Ps that have dramatically curtailed spending in the face of low commodity prices no longer protected by hedges.

The Permian Basin saw the greatest reduction of rigs, losing eight but remaining the only play to still have a triple-digit rig count. Comparing the Permian, Eagle Ford and Bakken, the Williston Basin has now dropped 70% of its rig count, the highest percentage among the three.

Since last year, the Fayetteville Shale has been emptied of its nine rigs and the Granite Wash has seen its rigs fall to eight from 38 in 12 months.

Wells Fargo Securities’ overview shows that for nearly every company in its coverage universe in 2016, E&Ps have dramatically reduced outspends—the difference between discretionary cash flow (DCF) and capex. For its coverage universe, overspending in 2016 is $2.97 billion compared with $13.25 billion in 2015.

Drilling companies continue to take a beating. Precision Drilling Corp. (NYSE: PDS) said Feb. 11 it recorded a net loss of $271 million in fourth-quarter 2015. The large loss was mainly due to decommissioning equipment and impairment charges of $369 million ($254 million after tax).

Compared with the same quarter in 2014, activity in the fourth quarter as measured by drilling rig utilization days decreased by:

  • 51% in Canada;
  • 55% in the U.S. and
  • 23% internationally.

Revenue also shrank by 44% to $345 million compared with fourth-quarter 2014. The company has been converting to Tier 1 rigs and retiring its older fleet of 236 legacy rigs. Precision’s fleet now consists of 238 Tier 1 rigs.

Kevin Neveu, president and CEO of Precision, said that in light of market conditions he was encouraged by the company’s gains in market share and strong operating performance, including a best in safety performance and record low unplanned downtime.

“Today we are operating 57 rigs in Canada, 32 in the U.S. and nine rigs internationally,” he said. “With the majority of these rigs under term contract, our margins are holding up well. However, in a market where incremental opportunities are limited, day rates can be expected to trend lower, which we plan to partially offset by ongoing cost reduction initiatives."

Hedge Hammer

With many companies’ production no longer buttressed as much—or at all—by hedging, most E&P’s capex are expected to fall. Barclays said it expects spending to fall by about 50% in 2016 from 2015 levels or a quarter of 2014 levels.

“At this depressed level of spending, U.S. oil volumes could fall by 1 million barrels of oil per day (MMbbl/d) by year-end,” said Thomas R. Driscoll, an analyst for Barclays.

Based on U.S. Energy Information Administration projections, shale gas production at major plays will continue to fall, led by a large decline in the Eagle Ford and a moderate decline the Marcellus, said Richard Hastings, an analyst for Seaport Global Securities LLC.

“Growth leadership from the Permian continues, but at a slower pace than in the past,” he said.

Through March, Seaport calculated that tight oil production will decline by 92.9 MMbbl/d of oil.

Darren Barbee can be reached at dbarbee@hartenergy.com.