MORGAN STANLEY: The plunge in rig counts will end in 12 weeks

Petrochina oil pump rigs daqing oilfieldREUTERS/China NewsphotoOilfield pumping units of PetroChina Daqing Oilfield Company Limited at Daqing, northeast China’s Heilongjiang province.

Oil rig counts will continue to plunge for just three more months.

In a note Tuesday, Morgan Stanley’s Ole Slorer writes:

The US rig count has historically troughed ~25 weeks after E&Ps decided to lay down rigs (we are currently 13 weeks in). This has proven true in all major energy downturns over the past 20 years in which US oil and gas prices fell by over 40%. We see this consistent time frame driven by the amount of time it takes to (i) finish committed work and (ii) renegotiate service pricing. Meanwhile, we believe the depth and slope of the rig count drop is driven by the magnitude of the decline in commodity prices and E&P cash flows.”

Rig counts have plunged as oil companies scaled back units to cope with the fallout of the oil crash.

And even with 12 weeks till we possibly see the bottom, the decline in rig counts has not dented production yet as less efficient units have been taken offline first, as we recently highlighted via Deutsche Bank’s Torsten Sl√łk.

Slorer also wrote that now is a good time to buy or increase holdings of oil services stocks.

Here’s Morgan Stanley’s chart comparing past periods of oil rig count declines to the current drop:

And here’s the latest chart showing the tumble in rig counts; the latest data from Baker Hughes showed US oil rigs are at the lowest level since December 2010:

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