HOW BASEBALL AND DRILLING RIGS ARE ODDLY SIMILAR

Averages annoy me because they don’t tell me what will happen next.  

Baseball, for example. Say that the batter walking up to the plate bats 0.300, which means that 30% of the time he gets a hit. That’s fine, but it won’t predict – can’t predict! – what he’ll do once he’s at the plate this time or the next. Perhaps he has trouble with the curveball and the pitcher is a curveball-throwing demon. Averages won’t help. Practice, patience and prayer, perhaps, but not averages.

Which is why I only reluctantly offer up this chart for your consideration:

As it shows averages, It may not be helpful for predicting, but it is interesting. First, let me explain the chart, then I’ll list 5 things that I find interesting about it.

In our firm, David Otte and Missy Parker spend all year digging into the financials of public and private oilfield service companies to determine each company’s product line revenues by quarter and by year.  The 25,000 estimates they make each year (and again the following year, and the next, and the next) have errors and guesses, but they are generally pretty close to actual product line revenues for all these companies around the world.

I’ve taken their total oilfield equipment and services revenue for each quarter (global) and divided it by the Baker Hughes active rig count (global) for that period to get oilfield equipment and services dollars per drilling rig per quarter. That is what is plotted here.

Things I notice when I look at this graph:

1. The ratio cycles within a tight range - $30-40 million per rig per quarter year after year.
2. In the boom year of 2014 with $90 oil, the average was $33 million. The average during the bust year of 2016 with $30 and below oil was $36 million per rig per quarter… almost 10% higher.
3. As the industry recovered with higher oil prices late in 2016 and into 2017, oil companies again spent less per active drilling rig… the average dropped to $34 million.
4. The worst drilling quarter – when fewest rigs were running and oilfield service company revenues were at their lowest – saw the highest spending per rig: $40 million in Q2 2016.
5. The average is $35 million of oilfield spending per drilling rig per quarter.

Let’s run a test.  

If a rig is running in Western Oklahoma throughout 2017 it will drill about 21 wells. According to this average ratio, that rig will generate $35M per quarter x 4 quarters = $140 million worth of oilfield spending per year, or just under $7 million per well.  If a jackup rig is working in the Middle East, that offshore rig might drill 7 wells at $20 million apiece.  Not perfect, but good enough to use as a planning tool to get an idea of the relative cost of drilling a new well.

A batting average won’t tell you what a batter will do next at bat, but it will tell you how he’ll probably do this season and if you, as a fan, should invest your time in him.  Average oilfield spending per rig won’t tell you exactly what a drilling rig is buying this quarter, but it will tell you to follow the rigs through good times and bad.  An active rig is a good rig.