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After falling for months and months, the U.S. rig count halted its plunge six weeks ago and has been on an upward swing. This is partially responsible for the renewed weakness in the oil price through the end of July and most of August. However, this closely watched number isn't as important as it once was according to Halliburton Company , which will soon be taking over the rig count data release when it closes its deal for Baker Hughes . Here's why it has its eyes on another number as an even more important driver for its business.
Counting what mattersThe reason why investors focus on the rig count is because it is seen as a rough gauge for industry activity levels and therefore the work being given to oil-field service companies like Halliburton and Baker Hughes. However, as technology has evolved over the past couple of years, it has started to diminish the overall importance of the rig count as a gauge for industry activity because rigs are so much more efficient these days. That was a point that Halliburton CEO David Lesar made on the company's second-quarter conference call. He noted:
In other words, Halliburton isn't as concerned about the number of rigs running as it is about the number of wells being completed. That's largely due to the fact that 60%-65% of the overall well cost is from completing a well (the actual hydraulic fracturing) than drilling it. Also, the rigs that are running these days are the most efficient rigs in the industry, which are shattering drilling records leading to more wells being drilled in a year per rig than ever before.
No longer correlatedBecause the rigs that are running are so efficient, it's leading to much less correlation between the rig count and industry activity levels. That was crystal clear in Halliburton's strong second-quarter performance as Lesar pointed out:
As Lesar noted, the company's revenue did not fall lock-step with the rig count decline. One of the reasons for this is that while the rig count in North America plunged 40%, its stage count, which is the hydraulic fracturing stages per well, fell less than 10%. This really helped the company to outperform expectations as its margins held up much better than expected largely due to the fact that it was completing nearly as many frack stages as before. This is not only because of the number of wells being completed, but the fact that horizontal laterals are getting longer and have more frack stages, which increases service intensity per well.
The other thing to keep in mind is the fact that a handful of larger oil companies have chosen to drill but not complete a growing number of wells. These wells will be the first to be completed when conditions improve and will likely prove to be a headwind to the rig count for a while. However, they'll provide a significant revenue source to Halliburton and Baker Hughes.
Investor takeawayAs the oil industry continues to heal, investors need to be aware that the rig count is no longer as important as it once was to Halliburton and Baker Hughes. Instead, their business is driven more by the well count, which hasn't yet fallen as steeply as the rig count, because rigs are so much more efficient these days. Furthermore, there is a growing number of drilled yet not completed wells that will act as a headwind to the rig count when conditions improve -- but as a tailwind for Halliburton's revenue because completions are a larger portion of a well's overall cost.
The article Halliburton Company: The Rig Count Isn't What Matters to Us Anymore originally appeared on Fool.com.
Matt DiLallo has no position in any stocks mentioned. The Motley Fool owns and recommends Halliburton. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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