U.S. Production Is Growing, Though You Wouldn’t Know It From The Rig Count

As volume-driven businesses, U.S. production of oil and gas is meaningful for MLPs for filling existing pipelines and processing plants, as well as providing growth opportunities. In the past, investors looked to the Baker Hughes ( BHGE ) rig count for an indication of future production growth. As an MLP investor, if someone told you that the oil rig count is currently 54% below its peak or the gas rig count is 89% below its peak (both of which are true [1]), you might be worried about U.S. production growth. However, if you just looked at the rig count, you wouldn’t have the full story. Rest assured, U.S. oil production in October 2017 -the latest monthly data available – was the highest it’s been since the 1970s and U.S. gas production set a record that month. In this piece, we’ll look at U.S. oil and gas production and why the rig count is not as good of an indicator as it used to be for U.S. production growth.

The number of oil and gas rigs in the U.S. is down significantly from prior peaks but has recovered from the lows of 2016. For overall production to grow, new wells must offset the production decline from legacy wells. Keep in mind, a well produces at its highest rates in the first several months of production and then volumes begin to taper (see Permian well graphic below). If you were looking at rig counts in isolation and comparing today to the previous highs, you might expect U.S. production to be hobbling along, but that’s not the case at all…


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