Drilling Down: How the Rig Count Downturn Signals a Golden Opportunity in Energy Equities

The U.S. energy sector is undergoing a seismic shift. As rig counts hit their lowest levels since January 2025, a chorus of analysts is declaring the end of the shale era. But here's the twist: this cyclical downturn is a contrarian's dream. For investors with a long-term view, the current slump in drilling activity presents a rare chance to buy energy equities at deeply discounted valuations—before the next upswing in commodity prices and production efficiency drives a resurgence.

The Paradox of Falling Rigs and Rising Production

The latest data from Baker Hughes reveals a stark reality: the total U.S. oil and gas rig count has plunged to 576 as of May 2025—the lowest since January of this year. Oil rigs now stand at 473, down 5% year-over-year, while gas rigs hover near historic lows at 100. Yet, despite this decline, the U.S. Energy Information Administration (EIA) forecasts crude production to hit 13.4 million barrels per day (bpd) in 2025, up from 13.2 million in 2024. How is this possible?

The answer lies in operational efficiency. Companies are optimizing existing wells, deploying longer laterals, and squeezing more oil from mature fields. The Permian Basin, for instance, has cut its rig count to 279—the lowest since late 2021—but still accounts for over half of U.S. oil rigs. This decoupling of rig activity and output growth creates a critical investing angle: lower drilling costs + higher efficiency = higher margins for producers.

Why the Rig Downturn Spells Opportunity

1. Valuations Are at Multi-Year Lows
   Energy stocks have been pummeled as rig counts fell. The Energy Select Sector SPDR Fund (XLE) trades at 13.5x forward earnings, near its 10-year average low of 12.8x. Compare this to tech stocks trading at 25x or higher, and the disconnect is clear.

Companies like ExxonMobil (XOM) and Chevron (CVX) now sport dividend yields of 6.2% and 5.8%, respectively—double their historical averages. For income investors, this is a no-brainer.

1. Capital Discipline = Shareholder-Friendly Strategies
   Producers are no longer chasing growth for growth's sake. Instead, they're prioritizing debt reduction, buybacks, and dividends. Diamondback Energy (FANG) slashed its 2025 capital budget by $400 million, while EOG Resources (EOG) returned $3 billion to shareholders in 2024. This focus on returns over rig counts ensures that even modest oil price recoveries will amplify profits.

1. Commodity Prices Are Due for a Rebound
   WTI crude hovers near $62/barrel—near the Permian's $61–65/bbl breakeven point—while natural gas prices have rebounded to $2.80/MMBtu after hitting a 32-year low of $1.80/MMBtu in early 2024. With global demand for LNG surging and U.S. production growth slowing, prices have nowhere to go but up.

The Contrarian's Playbook: Buy the Dip, Own the Rebound

The key to profiting here is selectivity:
- Focus on Majors with Strong Balance Sheets: Exxon and Chevron have the scale and liquidity to weather low prices and invest in high-margin projects.
- Target Permian Basin Experts: Devon Energy (DVN) and Occidental Petroleum (OXY) have low-cost assets and disciplined capex plans.
- Consider ETFs for Diversification: The XLE or Energy Income & Growth ETF (EMLP) offer broad exposure to the sector's top performers.

Risks? Yes—but the Reward Outweighs Them

Critics will cite maturing shale basins and the green energy transition as long-term headwinds. But let's be clear: renewables cannot replace liquid fuels overnight, and the U.S. remains the world's largest oil producer. Even in a slower-growth scenario, the current valuations and dividends make energy equities a compelling hedge against inflation and equity market volatility.

Final Call: Act Now Before the Crowd Catches On

The rig count downturn is not a death knell—it's a reset. With production still rising, cash flows improving, and valuations at generational lows, the energy sector is primed for a comeback. For contrarian investors, this is the moment to load up on energy stocks while sentiment is at its bleakest.

The drill is clear: Buy energy equities now—and ride the next cycle up.

This article is for informational purposes only. Always conduct your own research or consult a financial advisor before making investment decisions.