Oil Services Shares Dip As Rig Counts Slide

Morgan Keegan & Co. analyst J. Michael Drickamer said the rig count drop reflects an ongoing "carnage" in the industry.

"We believe that drilling activity is an important measure for energy investors to monitor as it serves as a proxy for demand in the oil field," Drickamer said in a note to clients. "As drilling activity increases, demand for rigs and services increases, tightening utilization levels, which eventually lead to higher pricing. Conversely, as drilling activity falls, as is the current case, demand for rigs and services decreases, leading to lower levels of utilization."

Adding to the industry's frustration, natural gas prices have dropped sharply since last summer when prices were well above $10 per 1,000 cubic feet. That makes it much less economical for natural gas producers to drill for the fossil fuel, and by extension demand for rigs falls.

In Monday trading, natural gas for May delivery fell 9 cents, or 2.5 percent, to $3.52 per 1,000 cubic feet on the New York Mercantile Exchange.

The drop in prices means some energy exploration companies have been willing to pay oil service company cancellation fees, rather than drill new wells, Drickamer said.