Although the land rig count should continue its steady rise in 2010, since many oil and natural gas exploration and production companies have announced plans to increase drilling levels over 2009, utilization and rig rates should stay well below peak levels due to the large amount of capacity sitting idle.
Another trend that should continue in 2010 is the shift in drilling from vertical to horizontal wells. In 2003, horizontal drilling had approximately a 30% share of drilling. The latest statistics indicate that more than 60% of drilling is horizontal. This trend should benefit companies with newer and more capable rig fleets.

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A Look At Large Cap Companies In The Sector
Helmerich & Payne
(NYSE: HP) is a major domestic land driller. The company has a proprietary rig design called FlexRigs, which comprises 175 of its 213 land rigs in the U.S. Helmerich & Payne will build 12 more of these flex rigs in 2010. The company believes that it receives a premium rig rate above its peers. Despite this premium, Helmerich & Payne has 73 rigs stacked, with another 39 being actively marketed as of December 2009.

Nabors Industries (NYSE: NBR) has the largest land fleet in North America, and CEO Gene Isenberg called the bottom in the rig cycle with the company's release of third-quarter earnings. Isenberg said, "We expect this quarter to represent the bottom in our consolidated results for this cycle. This is best illustrated by the bounce we have experienced in our U.S. Lower 48 land drilling operations, where we have seen over 20 rigs return to work since the low point in early August."

Permian Basin Rebound Predicted
Unconventional plays are not the only areas where a rebound in drilling is predicted. Basic Energy Services (NYSE: BAS) owns a fleet of nine drilling rigs in the Permian Basin and a much larger well-servicing fleet. The Permian Basin also saw a precipitous drop in drilling during this cycle, but Basic Energy believes that in 2010 the rig count will move markedly higher.

Rig Utilization Will Remain Low
Despite the anticipated rise in the land rig count in 2010, utilization will remain low due to the large number of rigs in the market. Patterson-UTI Energy (Nasdaq: PTEN) reported an average of 104 rigs operating in November 2009 out of a total fleet near 350.

Unit Petroleum (NYSE: UNT) reported an average utilization rate in the upper 20% range in the first nine months of 2009. The company owns 130 land rigs spread across several different basins from East Texas and Louisiana up to the Rocky Mountains.

Pioneer Drilling (NYSE: PDC) has a fleet of 71 drilling rigs and 74 workover rigs across the U.S. Although the company is reporting meaningful increases in rig demand in several shale basins, its utilization rate is still low at under 40%.

Bottom Line
While the trend will be up in 2010 for the land drillers, the industry must see huge demand to soak up the amount of idle capacity being actively marketed or cold stacked. The rig companies that will get the most business will be those with newer and more capable rig fleets designed for horizontal drilling. (For more, see Oil And Gas Industry Primer.)

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Tickers in this Article: HP, PTEN, UNT, BAS, PDC, NBR

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