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What's Behind the Rise in U.S. Drilling Rigs?

The total number of drilling rigs actively exploring and producing oil and natural gas in the United States increased to 585 for the week ending July 5, up from 581 the previous week. Despite this recent uptick, the current count still falls short of last year's 680, indicating a slowdown in drilling activities. Analysts suggest that this reduction may reflect greater efficiency among shale producers, who now require fewer rigs. Nonetheless, concerns remain about whether some producers have enough viable drilling land.

Breaking down the numbers, onshore drilling accounted for 562 rigs, slightly up from 560 the week before. Offshore drilling also saw an increase, with 23 rigs operating compared to 21 in the previous week.

Focusing on oil rigs, the count remained steady at 479, unchanged from the previous week, but still below last year's count of 540 and significantly lower than the peak of 1,609 seen in October 2014.

For natural gas, the rig count rose to 101, up from 97 the previous week, yet it still trails the 135 count from the same time last year. This current figure represents a dramatic 94% decrease from the all-time high of 1,606 rigs recorded in 2008.

Examining rig types, vertical drilling rigs held steady at 18 units. The count for horizontal and directional rigs, which includes advanced drilling technologies capable of penetrating dense shale formations, increased slightly from 563 to 567.

In the Permian Basin, the most active region in the U.S., the weekly oil and gas rig count remained steady at 305, matching the previous week but down from 342 the previous year.

Outlook for U.S. Oil and Gas

With the West Texas Intermediate crude trading above $80 per barrel, conditions are currently very favorable for exploration and production operations. However, despite the attractive pricing environment, there has been a noticeable slowdown in drilling activities. This trend may persist as companies in the upstream sector are now focusing more on delivering returns to shareholders rather than increasing production.

In this context, investors looking for medium to long-term opportunities might consider energy stocks like Diamondback Energy, Inc. and Matador Resources Company.

Diamondback Energy, a top Permian Basin operator, has been making significant improvements in well productivity, especially in the Midland Basin. Holding a Zacks Rank #3 (Hold), the company is expected to see continued growth in production volumes. Additionally, the upcoming merger with Endeavor, set to finalize in the fourth quarter of this year, will substantially expand its Permian holdings to about 838,000 net acres. This expansion promises an extensive inventory of prime drilling sites with a break-even oil price below $40 per barrel.

Matador Resources has also been active, entering into a $1.91 billion deal to increase its presence in the Delaware Basin. Slated to close in the late third quarter of 2024, this acquisition will bring Matador's holdings in the region to over 190,000 net acres. As a result, the company anticipates its production will surpass 180,000 barrels of oil equivalent per day, setting the stage for significant growth and enhanced operational scale.

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