Oil Drilling Stocks Suffer From Demand Pessimism

The stocks of oil drilling companies are in decline, falling alongside oil prices in a signal that some traders believe prices have further to fall yet.

Since the start of the year, the stocks of the four largest onshore drilling companies have shed an average of 32%, the Wall Street Journal reported today.
That’s a lot more than the decline of the energy sector of the S&P 500, which amounted to 8.2%, not to mention the broader index, which has gained 15%.
The rig count in the United States has also, unsurprisingly, been falling, reflecting the decline in oil prices. Since the start of the year, the number of active drilling rigs for oil and gas has declined by 11% to 695, per Baker Hughes data.

“Some investors are viewing this as the early stages of a down cycle,” Evercore ISI analyst James West told the Wall Street Journal.

Earlier this year, Reuters market columnist John Kemp wrote that oil production in the U.S. was set for a slump later in the year, noting the decline in drilling rigs, which had fallen from 627 in December 2022 to 591 in late April.
Kemp also noted at the time that there is a lag of up to a year between the start of a price rally and the increase in production that it prompted. The same delayed pattern was evident with price declines and production falls.

Some of the drilling companies themselves, however, disagree that their share price changes reflect the state of the industry as a whole. Some, the WSJ reports, believe their stock is being undervalued, since most of the rig decline since the start of the year has come from natural gas rather than oil.
There’s a disconnect between what’s happening with stock prices versus what’s happening in the field,” Andy Hendricks, chief executive of Patterson-UTI, told the WSJ. “We’ve only gone down from 132 rigs to 126 rigs this year, but our stock has sold off like we’ve gone down to 70.”