The Baker Hughes rig count this week showed more of the same pattern. The North American total headline count fell by 10 rigs to 956, and the all-important U.S.-based oil-focused rig count fell by six to 572.
It's worth noting that a six-rig decline now represents more than a 1% weekly fall, whereas last year at this time it would have been a barely noticeable 0.38% decline. Percentages matter, and in this case these percentages show the rapid pace of decline in U.S. oil drilling.
One might think there is a disconnect by looking at the increased fourth-quarter production guidance released with earnings reports this week by major independent drillers such as Diamondback Energy (FANG) and RSP Permian (RSPP). That's not really true.
First, the exploration and production companies that have been raising guidance have been doing so in very small increments. They know how to play the game. Wall Street likes increased guidance, no matter how small.
There is a more fundamental factor, however, behind these increased outlooks. These companies are simply getting better at what they do. When WTI crude futures were trading at $100 per barrel, E&P management presentations were full of talk of high-grading acreage, enhanced completion techniques and greater use of proppants.
As someone who attends more investment conferences than any sane man should, I can tell you that the general audience response to these technical innovations was: yawn. Just produce as much as you can, we don't care how you do it!
But with WTI now trading at $45 per barrel, those innovative techniques are absolutely crucial. There is some contango in the forward curve, but one has to go out to November 2016 to find a futures contract that is currently trading above $50 per barrel.
To drill a well now, an operator must be much more efficient than two years ago to produce an internal rate of return that meets hurdle rates for capital allocation.
Obviously, the lower rig count shows us that many wells that might have been drilled two years ago no longer meet those hurdle rates. But the rig count is not zero, so clearly some still do. It is the enhanced drilling and completion techniques that are allowing that to happen.
In the grand scheme, lower rig counts now mean lower U.S. production in 2016, and that is supportive of oil prices. I continue to believe oil prices are forming a bottom here.
That doesn't mean, however, that each individual company's production is going to decline dramatically. And the ones that can maintain production while drilling fewer wells -- such as Diamondback Energy and RSP Permian -- will continue to surprise analysts to the upside with quarterly earnings, as they did this week with their third-quarter 2015 numbers.
The end of my Friday column on rig count data has become my weekly forum to kvetch about Magnum Hunter Resources (MHR). MHR announced last night a deal with its creditors that included a $60 million line of credit through December 30 of this year.
Magnum Hunter's not going to make the $29 million interest payment due on its senior notes next Friday, but the company has been granted forbearance by both its first- and second-lien lenders for that omitted payment.
Magnum's management has bought themselves enough time to finally close the sale of the company's 45% stake in the Eureka Hunter pipeline and fix the balance sheet once and for all. The 8-K filed with last night's press release noted that MHR had received six formal bids for Eureka
Magnum's preferreds have gone bananas this week and I haven't sold a single share. I still believe MHR common offers much upside, especially since the bankruptcy wolf is no longer at the door.