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Analysis: Forget rigs, it's wells that count now in oil services

By Braden Reddall

(Reuters) - A combination of oil and gas innovations and well-site cost cuts is rendering the long-vaunted U.S. rig count a less important oilfield indicator than the number of holes in the ground.

So in keeping with the times, oilfield services company Baker Hughes Inc is complementing the rig count it has tallied for more than 70 years with a new metric: U.S. well counts.

As wells become more complicated, bringing them online and keeping them producing has become a bigger part of the business than just drilling. For Baker Hughes and rival Halliburton , this means rig numbers alone are no longer such a direct indicator of profits.

Whereas they stand to gain from a drive for more drilling efficiency, companies that rent out rigs like Nabors and Helmerich & Payne are in line for a smaller slice of the pie.

Halliburton's second-quarter performance spells out the change: North American profit margins rose by 1.2 percentage points compared with the first quarter, even though the rig count has been flat all year.

Industry-wide, Baker Hughes set out this contrast with a predicted 8 percent drop in the average U.S. rig count for 2013, alongside an expected decline in onshore wells of just 4 percent, to 35,000.

Underlying the efficiency gain is "pad drilling," in which multiple wells are drilled from one site. Halliburton estimates half the U.S. activity in major oil basins now takes place on such pads, yielding fat savings by avoiding the cost of moving equipment between sites and extracting oil and gas faster than vertical wells.

Pad drilling came of age alongside the horizontal drilling techniques that unlocked shale resources, because such wells can shoot out in different directions from one spot. An early rush to just hold acreage by drilling on it has given way to a drive to cut costs by exploration companies paying for the wells.

"We've seen probably upper-single-digits-type improvement in terms of efficiency even in the current year," Halliburton Chief Operating Officer Jeff Miller said on Monday. "That's on the back of double-digit efficiency gains last year. So I expect that there is still headroom to grow around that scenario."

Even with no rig count growth expected, the company sees further margin improvement on the back of "drilling efficiencies and further adoption of pad well drilling."

The savings are clear in pressure pumping - used in hydraulic fracturing - since moving equipment between well sites represents a big cost, both in terms of logistics and downtime.

"It's surprising how much is being converted to these pad locations so quickly," Baker Hughes Chief Executive Martin Craighead said.

He said Baker's revenue earned at pad drilling operations had doubled in the past year, and that pressure pumping margins on the pads showed an improvement of 30 percent to 50 percent over regular wells.

In the Eagle Ford basin in Texas, Halliburton said pad drilling had gone from less than 40 percent of activity last year to more than 60 percent today.

Beyond that, Global Hunter Securities analyst Brian Uhlmer explained that the shift in thinking about well numbers versus rigs reflected the fact that wells in various parts of the country had variable needs.

"That's different from 10 years ago, when the holes were all about the same depth, and required the same intensity of services," Uhlmer said.

Craighead said this variation could now be measured with its rig and well counts, and that in three U.S. basins, rigs were drilling about 20 percent more wells on average than last year.

(Reporting by Braden Reddall in San Francisco; Editing by Patricia Kranz and Peter Henderson)

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