US drillers cut oil and gas rigs to lowest since November 2021 -Baker Hughes

U.S. energy firms decreased the number of active oil and gas rigs for the fifth consecutive week, reaching the lowest level since November 2021, according to Baker Hughes. The total rig count fell by three to 563, a 6% year-over-year decrease, driven by lower oil and gas prices leading firms to prioritize shareholder returns over increased output; despite reduced capital expenditures expected in 2025, the EIA projects crude output to rise to 13.4 million bpd in 2025, while increased gas prices are anticipated to boost drilling activity and gas output.

Analysis

U.S. energy firms have reduced the number of operational oil and natural gas rigs for the fifth consecutive week, bringing the total count to 563 as of May 30th, the lowest level recorded since November 2021, according to Baker Hughes. This marks a 6% year-over-year decrease, with 37 fewer active rigs compared to the same period last year. Specifically, oil rigs declined by four to 461, also their lowest since November 2021, while gas rigs saw a marginal increase of one to 99. The Permian Basin, the largest U.S. oil-producing shale formation, experienced a reduction of one rig, totaling 278, its lowest since November 2021. This downward trend, with 24 rigs cut in May alone, reflects a broader strategy by energy companies to prioritize shareholder returns and debt reduction amidst lower oil and gas prices observed over the past two years. Consequently, independent E&P firms tracked by TD Cowen are planning an approximate 3% cut in capital expenditures for 2025, following flat spending in 2024 and substantial increases in 2023 (27%) and 2022 (40%). Despite these reductions in drilling activity and planned capex, the U.S. Energy Information Administration (EIA) projects an increase in crude oil output from a record 13.2 million barrels per day (bpd) in 2024 to around 13.4 million bpd in 2025. Similarly, while natural gas output is expected to rise to 104.9 billion cubic feet per day (bcfd) in 2025 from 103.2 bcfd in 2024, driven by a projected 88% increase in spot gas prices which is anticipated to spur drilling activity after output cuts in 2024 due to a 14% price drop.

Key Decisions for Investors

• Investors should monitor the developing divergence between falling U.S. rig counts, indicative of reduced drilling activity and capital discipline, and the EIA's projections for increased oil and gas production, which implies reliance on efficiency gains or completion of previously drilled wells.
• Consider the contrasting outlooks for oil and natural gas markets: while EIA forecasts continued crude price declines in 2025 alongside rising production, a significant projected increase in natural gas spot prices is expected to incentivize renewed gas drilling activity, potentially offering differentiated investment opportunities.
• For oilfield service providers like Baker Hughes, the sustained decline in active rigs to multi-year lows may present near-term headwinds to revenue and activity levels, warranting close observation of their adaptation strategies and market positioning despite broader production growth forecasts.