Billionaire Oilman Gives a Clue on When Oil Prices Will Bottom
By Matt DiLallo | More Articles
January 18, 2015 | Comments (10)
T. Boone Pickens. Photo credit: Flickr user Steve Jurvetson.
T. Boone Pickens has been in the oil business for about 50 years. Over that time he has seen his share of booms, busts, and subsequent recoveries. He thinks the current bust in the price of oil is just like all the rest: supply is out of whack, OPEC is talking tough, and the U.S. oil industry must brace for another ugly downturn.
That being said, Pickens doesn't think the latest bust will last all that long. In fact, in December he made a bold call that the price of will be back over $100 per barrel within the next 12 to 18 months. However, before oil can rebound, the price must hit bottom. Pickens, who has seen his share of oil market bottoms over the years, gave investors an important sign to look for that prices are at rock bottom. The sign, he said in a recent social media chat session, is a big drop in the number of operating drilling rigs.
"Watch the rig count"
During the chat, Pickens was asked, "what are the signs you will look for to determine that the oil [market] may be bottoming?" He responded: "too many to list here, but one key factor is [the] number of drilling rigs operated." He later elaborated in the answer to another question:
Watch the rig count. They are falling already. Down 180+ and counting. Will probably go down by 500-600.
Pickens was referring to the U.S. rig count, which is the number of rigs active in drilling new oil and gas wells. His comments suggest that the price of oil will finally stop falling when a sufficient number of rigs are idled. This is because oil rigs are the key to adding new supply to the market, so a significant reduction in the number of rigs should start to contract the current oversupply of petroleum.
The following chart illustrates a compelling historical correlation between plunging rig counts and a bottoming in oil prices.
US Active Well Service Rig Count Chart
US Active Well Service Rig Count data by YCharts.
Note that in the 2008-2009 oil price plunge about 1,000 rigs, roughly 40% of active rigs at the time, went idle in a short period of time. However, the price of oil actually started to recover well before the rig count did. This is why Pickens thinks the rig count will only fall by 500-600 from the recent peak of around 2,000 rigs. before oil prices are ready to rebound. By his count the industry has already stopped operating about a third of the rigs necessary to put a bottom in oil prices.
Rigs are dropping like flies
Typically, the U.S. rig count changes rather slowly. Oil companies tend to sign a rig contract for months or even years, and they stagger the expiration dates of these contracts. But the current rig count is coming down fast. For example, the rig count in North Dakota's Bakken shale recently fell to its lowest point in four years -- down to 159 from the 183 rigs that had been drilling in the state in December. This is a direct result of massive capital expenditure reductions by oil companies: Bakken-focused drillers Continental Resources (NYSE: CLR ) , Oasis Petroleum (NYSE: OAS ) and Halcon Resources (NYSE: HK ) have all slashed capital spending by 50% from previous levels.
Photo credit: Flickr user Lindsey G.
Oil companies are also increasingly bailing on rig contracts, often writing big checks not to drill new wells. Pioneer Energy Services (NYSE: PES ) alone has been handed back seven rigs so far this year, and has been paid $22 million in early termination fees for these contracts. The company expects contracts for another 10 rigs will be terminated before the end of the first quarter. We can expect to see more announcements of early rig contract terminations, as oil drillers would rather pay the fee than lose big money on an unprofitable well.
Investor takeaway
While markets tend to be irrational, there are signs that a panic is subsiding and a market is bottoming. When it comes to oil prices, T. Boone Pickens suggests investors watch rig counts, which have a pretty direct correlation to the price of oil. He believes the U.S. needs to drop 500-600 rigs from its peak of around 2,000 before we hit bottom. According to the rotary rig count published by oil driller Baker Hughes, the total rig count for onshore and offshore assets stands at 1,729 as of Jan. 16. That suggests that we're likely going to see many rig reduction announcements over the next few months.
Matt DiLallo has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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Report this Comment On January 18, 2015, at 12:08 PM, yardomd wrote:
T Boone Pickens is an experienced senior engineer. He understands oil production better than most. Geopolitics are another factor alltogether. China is buying up the surplus already, befor the stuff hits the fan again.
Report this Comment On January 18, 2015, at 12:40 PM, dn32844 wrote:
It will bottoms up when the U.S. government realizes it has little or no effect on Russian & Iranian economy, an And instruct its Arab puppets headed by Saudis to get back to their business as usual.
Report this Comment On January 18, 2015, at 12:48 PM, rimrocks99 wrote:
What Mr.Pickens is saying here obviously makes no sense. If you look at the chart, price leads rig count. Not the other way around. The rig count responds to the price. For a few years, over supply can be controlled by reducing the production at existing wells. Wells that are not plumbed to pipelines will be the first to have production curtailed as the transportation costs are higher for these. When the supply begins to equal demand, well production can then be restored. Only when the price increases to the point that drilling new wells looks very profitable, will the rig count increase. Rig count is not a tool for prediction. Drilling in shale areas is not like wild catting. The chance a well will produce favorably in shale is over 90 percent.
Report this Comment On January 18, 2015, at 12:54 PM, HannibalKhan wrote:
It may and it may not. Green energy, wind and especially solar, are making big strides in producing energy. Even the Arabs are investing heavily in solar energy. Wind and solar energy technology has made tremendous improvements just in the last 12 months. Efficiency has dramatically improved and is getting better and better. Equipment and installation prices are coming down. Electric cars are becoming more and more popular. The car companies are full throttle ahead on producing such vehicles. Tesla is working on battery technology that will allow a car to run 500 miles between charges. Tesla is installing charging stations all across the country. No; I think oil and natural gas may well be facing extinction.
Report this Comment On January 18, 2015, at 1:12 PM, ken62 wrote:
first, why is a guy from a small liberal arts school outside the Oil states and with no relevant degree/notable experience in the energy sector Motley Fools Oil and Gas reporter?
Second, Boone damn sure didn't anticipate the bubble burst so he knows no more than I do and I live in Texas.
Third, China buying oil can only go so far for two reasons. First, they have no huge on-land storage capacity. Second, there are only so many tankers they can lease to store more oil.
Report this Comment On January 18, 2015, at 1:16 PM, sunnamp wrote:
So why is it with the rig count dropping we are still producing the same amount of oil? Sounds like he is trying to schill up the price. I actually never believe anything he says.
Report this Comment On January 18, 2015, at 1:54 PM, willowbrook wrote:
Pickens is an energy cheerleader.
CNBC is a stock market cheerleader.
Their simplistic 'analysis' is intended to persuade.
Rarely is it either accurate or reflective of the realities.
Report this Comment On January 18, 2015, at 1:55 PM, raymen81 wrote:
If you had waited for the rig count to bottom you missed a $40 move in oil price move or more. With all the smart people in the investing business surely someone has a better solution of determining the oil price bottom.
Report this Comment On January 18, 2015, at 2:07 PM, SSBN620 wrote:
Good stuff. Makes sense, seems logical.
Two thumbs up. Thanks Matt, Slim, and Fool
Report this Comment On January 18, 2015, at 2:12 PM, Gourmand wrote:
Listen to T. Boone Pickens who has a vested interest in the price going up? No way. I'd rather find out what made the Rockefellers sell all oil assets 6 months ago; some networks are impenetrable by the Johnny Come Latelys. Personally, I feel we now have a ceiling price of $60 since any time it goes higher, the oil producers will fear large scale US increase in production. In view of the fact that T. Boone was talking about it going back to $100 a week or two ago, he is off my radar screen for opinions.
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