Energy Sector Rebalancing Amid Prolonged U.S. Drilling Declines

The U.S. energy sector is undergoing a seismic shift as the rig count enters its 15th consecutive week of decline—the longest streak since 2016. With 539 active rigs as of August 22, 2025, the industry faces a stark reality: exploration and production (E&P) firms are outperforming energy equipment and services (EES) players in a low-rig environment. This divergence highlights a critical inflection point for investors, where strategic positioning between resilient E&P operators and vulnerable EES providers could determine long-term returns.

The E&P Resilience Play

Despite the 15-week rig decline, E&P companies are defying expectations. Natural gas production hit a record 106.7 billion cubic feet per day (Bcf/d) in August 2025, driven by efficiency gains and disciplined inventory management. Producers like Coterra Energy and CNX Resources have leveraged reduced drilled-but-uncompleted (DUC) well inventories to boost output without increasing rig counts. For example, Appalachia's DUCs dropped by 60 from January to July, while Haynesville producers cut 25 DUCs in the same period. These optimizations have allowed E&Ps to maintain production growth even as rigs decline.

The key to E&P resilience lies in their ability to prioritize capital discipline. Companies such as Expand Energy and National Fuel Gas have raised production guidance for 2026, citing improved well performance and cost controls. This focus on efficiency—rather than sheer rig count—has enabled E&Ps to navigate weak commodity prices. For instance, Texas's oil rig count fell 65% from 2014 to 2024, yet production rose 94%, thanks to advancements in horizontal drilling and fracking.

The EES Vulnerability

Conversely, EES firms are struggling to adapt to the prolonged rig decline. With U.S. oil rigs down 46 from the same period in 2024 and gas rigs facing similar pressures, demand for drilling services has plummeted. Companies like Halliburton and Schlumberger are seeing reduced contract volumes, particularly in the Permian Basin, where rig counts have fallen to 251 as of August 2025—the lowest since 2021.

The EES sector's reliance on cyclical rig activity makes it inherently vulnerable in a low-demand environment. While E&P firms can pivot to optimize existing assets, EES providers lack the flexibility to offset declining rig counts. This is evident in the sector's underperformance relative to E&Ps, as illustrated by the stark contrast in stock price trajectories over the past three years.

Strategic Investment Insights

For investors, the energy sector's rebalancing presents a clear opportunity: lean into E&P firms with strong balance sheets and operational efficiency, while approaching EES providers with caution. Here's how to position a portfolio:

1. Prioritize E&P Resilience:
2. Target companies with low DUC inventories and high well productivity, such as Coterra Energy (CTRA) and Expand Energy (XEC).
3. Favor firms with robust shareholder return programs, like National Fuel Gas (NFG), which has raised dividends and production guidance.

4. Monitor E&P guidance updates for 2026, as companies like CNX Resources (CNX) demonstrate confidence in growth despite rig declines.

5. Avoid EES Overexposure:

6. EES firms remain at risk until rig counts stabilize. However, consider selective plays in niche areas like digital oilfield services, where demand for efficiency tools is rising.

7. Watch for EES companies with diversified revenue streams or strong cash reserves to weather the downturn.

8. Leverage Sector Rotation:

9. Use the E&P-EES divergence to hedge portfolios. For every EES holding, balance with a high-margin E&P play.
10. Reallocate capital to E&Ps that are outperforming in production growth while maintaining disciplined capital expenditures.

The Road Ahead

The U.S. rig count's 15-week decline underscores a structural shift in the energy sector. E&P firms are proving that production growth is achievable through efficiency, not just scale. Meanwhile, EES players face a prolonged period of adjustment. For investors, the lesson is clear: align with the winners of this rebalancing—companies that turn constraints into competitive advantages.

As the EIA forecasts continued rig count declines into 2026, the energy sector's next chapter will be defined by those who adapt. The question for investors is not whether to participate, but how to position for the inevitable.