New study says Texas drilling rig decline could bottom out in May

Morgan Stanley report suggests Texas drilling outlook already improving in some top tier counties

Is Texas drilling ready for an upswing this summer? A Morgan Stanley analyst says Texas operators may already be ramping up as the decline in the drilling rig count appears to be bottoming out.

Permian-Midland-rigs-30apr15“Many of the second tier counties are starting to see rig counts rise, particularly in the Eagle Ford, Permian Midland and Permian Delaware,” writes Adam Longson in the report. “The Bakken is still facing broad declines in rigs in most counties due to low prices and wide differentials.”

Longson argues that historically the bottom in the US oil rig count occurs approximately four months after the bottom in prices. Since prices hit their trough in January, the US rig count is likely to trough in May.

“Similarly, the median peak-to-trough in both prices and rig count tends to be eight months. This relationship generally held with prices with the peak coming in June 2014 and the trough in Jan 2015,” the report notes.

“The US rig count peaked in October 2014, which would suggest a May-June trough as well.”

Longson says much of the initial decline in the US rig count came from lower quality rigs and counties.

“We also have seen greater declines in lower quality counties. In some of the highest IP counties, we have seen rig counts increase since Dec.,” he wrote.

“Vertical/directional rigs, which are much less prolific, have fallen more in percentage terms than horizontal rigs.”

According to Reuters, Brent crude traded at as little as $45.19 a barrel on Jan. 13, the lowest in almost six years. It traded at $64.97 on the ICE Futures Europe exchange in London as of 1:35 p.m. local time, marking an advance of 18 percent this month. West Texas Intermediate, the U.S. benchmark, fell to $42.03 on March 18, close to its January low of $43.58.

The Energy Information Administration is forecasting American shale output fall next month for the first time since it began reporting monthly data in 2013.