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Chesapeake Energy Corporation (CHK), Kodiak Oil & Gas Corp (USA) (KOG), Whiting Petroleum Corp (WLL): Do Rig Counts Even Matter Anymore?

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The number of rigs drilling for oil and natural gas has long served as one of the most important metrics for gauging the health of the energy industry.

But recently, the usefulness of rig count data has been called into question. Specifically, commentators have noted a sizable disconnect between the number of active rigs in a play and production from that play. Let’s take a closer look at why this is and whether or not rig counts are as important as they used to be.

Earnings Quality Report: Chesapeake Energy Corp. (NYSE: CHK)

Improvements in drilling efficiency
The disconnect between rig counts and production can largely be explained by one major factor — drastic improvements in drilling efficiencies.

Since hydraulic fracturing and horizontal drilling methods gained widespread commercial acceptance several years ago, oil and gas producers have continued to report efficiency improvements as they optimize their techniques even further.

Pad drilling methods have become especially popular, since they allow operators to more efficiently drill multiple wells from the same pad. This has enabled numerous companies to dramatically reduce the number of days taken to drill and complete a well.

Sharp decline in drilling days
For instance, in the Bakken shale of North Dakota, Kodiak Oil & Gas Corp (USA) (NYSE:KOG) reported that fourth-quarter spud to rig release days were down to the low 20s for a typical 10,000-foot lateral well — a sharp reduction from nearly 35 days a year earlier. In fact, a recent Kodiak Oil & Gas Corp (USA) (NYSE:KOG) well completed in the fourth quarter was drilled in just 18 days — a company record.

Pad drilling methods have also allowed operators to use fewer rigs to drill the same number of wells. For instance, Whiting Petroleum Corp (NYSE:WLL), another major Bakken operator, reported a substantial decline in drilling expenses over the past year because of a successful transition toward multi-pad drilling, allowing the company to drill the same number of wells with fewer rigs.

Similar improvements can be seen in Texas’ Eagle Ford shale. In June 2012, operators in the play averaged just around 19 days to drill a horizontal well, down from an average of 23 days a year earlier. Chesapeake Energy Corporation (NYSE:CHK), whose operations have focused intensely on the liquids-rich play, said it averaged just 18 days to move between Eagle Ford wells in the fourth quarter, down from 26 days two years ago. It also reported drilling a recent well in just under eight days — a company best.

Previously, the process of moving a drilling rig between two locations was rather cumbersome. A rig needed to be disassembled at one well site and then reassembled at the new one, even if the new site was just a few yards away. But now, using hydraulic walking or skidding systems, a rig can be lifted and transported a short distance to the new drilling location.

In fact, improved rig mobility and the introduction of pad drilling techniques have even allowed operators to transport rigs between locations that are much further apart. For instance, rig operator Nabors Industries Ltd. (NYSE:NBR) reported moving a fully assembled rig a length of one mile between drilling locations.

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