The North American land drilling cycle appears to be intact despite the plunge in natural gas prices and cuts in dry gas drilling across the exploration and production industry. This conclusion is based on an examination of recent operational data and management commentary during the earnings season. Investopedia Markets: Explore the best one-stop source for financial news, quotes and insights.

The Evidence
Basic Energy Services (NYSE:BAS) is an oil service company that provides well site services to onshore oil and gas wells in the United States. The company just released operating data for January 2012, providing an excellent look at recent activity levels.

The company reported a 76% well servicing rig utilization rate for the month, up from 69% in December 2011. It reported drilling rig day's utilization of 84% in January 2012, down from 89% in December 2011. The company estimates that this decline will be temporary and is looking for 90% utilization over the next few quarters. (For related reading, see What Determines Oil Prices?)

Advertisement - Article continues below.

It also highlighted the Permian Basin area as having strong demand in January 2012. The company estimates that 70% of its current activity is related to development activity in crude oil and other liquids areas.

Baker Hughes (NYSE:BHI) reported that the land rig count in the U.S. averaged 1,960 in January 2012, about flat with the 1,961 working in December 2011. This still represents strong growth over January 2011, when 1,685 rigs were working.

Patterson UTI Energy (Nasdaq:PTEN) just reported results for the fourth quarter of 2011, and disclosed that the average number of rigs operating increased to 232 in North America, up from 220 in the previous quarter. The company also reported increases in average revenue and margin per operating day on a sequential basis.

Patterson believes that its operated rig count will continue to move higher, and estimates that it will average 241 rigs in January 2012.

The company management repeats the common industry argument that any rigs moved out of dry gas plays will find work in crude oil and liquid plays. The company estimates that only 30 of its rigs currently operate in dry gas areas. This total includes only rigs with contracts of less than a year or on well-to-well contracts.

The company also feels that even if some of its rig contracts are not renewed, the quality of the it's rig equipment will crowd out lower quality equipment in the market.

Despite this optimism, a growing number of exploration and production companies have announced reductions in drilling in the onshore U.S. The latest was WPX Energy (NYSE:WPX), which recently separated from Williams (NYSE:WMB) and is now an independent public company.


WPX Energy plans to spend $1.2 billion in capital in 2012, down from the original range of $1.2 billion to $1.8 billion given in late 2011. The company said that $400 million in cuts would come from natural gas areas. Total company production is expected to grow by 4% in 2012, compared to the previous estimate of double digit percentage growth. (For related reading, see A Natural Gas Primer.)

The Bottom Line
The land drilling cycle still appears to be moving higher despite the recent cuts in dry gas drilling in the U.S. This may change if natural gas prices continue to decline, and these drilling reductions spread further through the industry.

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

At the time of writing, Eric Fox did not own shares in any of the companies mentioned in this article.