It’s reset time in the oil services sector as an uncertain 2013 gets under way. Domestic rig count did its own reprise of a fiscal cliff tumble as the fourth quarter 2012 spiraled to an end, dropping 41 units in the final week of December and exacerbating a trend that saw fourth-quarter 2012 average rig count finish 4.5% below third-quarter levels.
While late fourth-quarter seasonal drops in rig count are the long-term norm in the industry, thanks to a combination of weather, year-end budget expiry and smaller privately held operators finishing out drilling programs, something about the end of 2012 seemed, well, different. Part of it was due to the velocity gain in the activity drop. Average quarterly rig count had deflated at a rate between 40 and 50 units per quarter after peaking in the fourth quarter of 2011. But that rate accelerated to 66 units in the fourth quarter of 2012, when the average number of rigs listed as drilling ahead dropped to 1,374 ? the lowest number since third-quarter 2010.
Similarly, after two years of impressive gains following the dim days of 2009, average annual domestic rig count fell 60 units, or 4%, to 1,462 in 2012, roughly midway between the peak of 1,877 recorded in 2008 and the trough of 950 one year later in 2009.
Thus the fourth quarter 2012 exited on a down note, bringing an end to a year that began with hopes of a 7 to 10% increase in domestic drilling activity. With domestic capital spending expected to be flat in 2013, it appears that annual rig count will also finish down incrementally when the final numbers are in one year from now — though quarterly rig count in 2013 should be higher than that recorded in fourth-quarter 2012.
So what changed? A look at three key trends in 2012 suggests the industry is undergoing a transition that will continue into 2013. Those key themes include:
Commodity Prices: The year 2012 began with soaring crude oil prices and rapidly deflating natural gas prices on the basis of a historically warm winter. Wellhead prices for crude oil hit $100 in November 2011 and remained above $95 for seven straight months. Conversely, natural gas prices spent 11 months below $3 in 2012 and ultimately fell to 10-year lows, dropping to $1.89 at the well head in April 2012. At midyear, natural gas liquids prices