It's been a while since I have written a column analyzing Baker Hughes' (BHI) weekly rig count data. BHI's figures are released every Friday at 1 p.m. ET, but there seems to be a little less urgency surrounding the figures now that West Texas Intermediate oil prices have risen back into the high $40-a-barrel range.
The overriding word in this week's release was "flat." The most widely analyzed of BHI's data -- the number of U.S.-based oil rigs in action -- remained flat with last week's reading at 308. Oil futures came off a little bit after the figures were released, but still managed to end the session with a NYMEX close of $47.75, a 3.3% gain for the week. Today was expiration Friday not just for equity futures, but for the contract for June delivery of WTI oil as well.
That contract posted a stellar run in the last four months of its existence, rebounding from a late-January low of $30.79. A 55% gain in four months is a massive swing for any commodity, let alone the world's most liquidly traded one, and I guess the "oil is going to $20" Grim Reaper crowd did not get to win this time after so much success jawboning front-month futures down through the majority of 2015 and into 2016.
Looking inside this week's figures, the number that jumped out at me was the U.S. offshore count of 24 rigs. That's up from 22 last week, a low that hadn't been breached since November 2010.
Have we reached an inflection point in Gulf of Mexico drilling? I hesitate to overreact to one week's data, but with a healthy amount of contango still in the curve -- December 2016 WTI futures are quoted at $50.09 as I write this -- the answer is quite likely "yes." Offshore projects are by definition longer-lead-time plays than onshore, and the slope of the futures curve is as important as the front-month reading.
One could drive oneself bananas Googling "Gulf of Mexico break-even oil price" in an attempt to find the magic price at which offshore drilling will restart in earnest. There are so many differing opinions out there that there really is no magic target price.
One interesting data point, though, was Shell's (RSD.A) July 2015 decision to greenlight the Appomattox deep-water field in the gulf. In its press release, Shell noted an internal project break-even price of $55 a barrel for Brent crude. Brent is trading today at $48.82 with December 2016 futures contract trading at $50.66 and a December 2017 contract trading at $52.50.
So, it's not "Katie bar the door," but we are getting back to the point where Gulf of Mexico drilling is going to become attractive again. Also bear in mind that other projects would have lower break-evens than Shell's enormous Appomattox, which has targeted peak production of an enormous 175,000 barrels a day from 15 wells and includes China National Offshore Oil Corp. (CNOOC) as a 21% partner.
Independent companies don't have the capital flexibility of CNOOC and Shell, but they don't have the bloated cost structures, either. So if oil continues its epic rebound, I would look for the independents to jump back into the pool this summer.
One way to play this is to go for companies that provide the rigs or service them. Ocean Rig UDW (ORIG) shares are trading up 26% today after better-than-expected first-quarter results, and that could be a harbinger for better performance from the beaten-down offshore oil services group. Noble Energy (NE) is always a good go-to for offshore exposure, and its shares have risen 20% in the past six weeks. Finally, Teekay Offshore Partners (TOO), which owns FPSOs, FSOs and shuttle tankers, is a more obscure name, but an equally effective way to play a rebound in offshore drilling.