Energy Sector Resilience and Sector Rotation: Navigating the Rig Count in a High-Interest-Rate Environment

The U.S. Baker Hughes Total Rig Count, a barometer of exploration and production activity, has stabilized at 539 rigs as of August 15, 2025, but this figure masks a deeper narrative of sector rotation and strategic reallocation. The year-over-year decline of 8.33% from 588 rigs in 2024 underscores a shift in capital from oil to gas production, driven by divergent price trends and efficiency gains in drilling technologies. This shift is not merely a cyclical adjustment but a structural recalibration in response to a high-interest-rate environment and evolving energy dynamics.

The Rig Count as a Sector Rotation Signal

The rig count data reveals a critical trend: 412 rigs are dedicated to oil, while 122 are allocated to gas. This 3:1 ratio reflects a strategic pivot toward gas, which has outperformed oil in terms of price stability and demand resilience. Natural gas prices are projected to rise 65% in 2025, driven by infrastructure projects and geopolitical tensions disrupting shipping routes. Meanwhile, oil prices, though volatile, remain anchored by OPEC+ discipline and global supply constraints.

For investors, this divergence signals an opportunity to rebalance portfolios toward gas-focused energy producers and midstream operators. Companies like EQT Corporation (EQT) and Cheniere Energy (LNG) are well-positioned to capitalize on this trend, as are midstream firms with exposure to liquefied natural gas (LNG) and natural gas liquids (NGLs). These assets offer not only income generation through high dividend yields but also a hedge against macroeconomic instability.

Energy as a Defensive Play in a High-Interest-Rate Environment

The energy sector's resilience in Q1 2025—delivering a 9.9% return compared to the S&P 500's -4.6%—highlights its role as a defensive asset class. Integrated supermajors like Chevron (CVX) and Shell (RDS.A) gained 16.8% and 18.2%, respectively, while refiners such as Phillips 66 (PSX) and Valero (VLO) outperformed with gains of 9.4% and 8.6%. These results stem from strong pricing power, operational efficiency, and a 3.3% dividend yield that dwarfs the S&P 500's 1.3%.

However, Q2 2025 brought volatility as oil prices corrected from $80 to $60 per barrel, dragging the S&P 500 Energy Index down 8.6%. This underperformance underscores the sector's sensitivity to commodity price swings and trade policy uncertainty. Yet, the anticipation of Federal Reserve rate cuts in late 2025 has provided a counterbalance. Lower borrowing costs and a shift in investor sentiment toward income-generating assets have supported energy equities, particularly those with low debt and exposure to energy transition technologies.

Industrial Conglomerates: A Cautious Outlook

In contrast, industrial conglomerates face a more uncertain landscape. While the Schwab Center for Financial Research maintains a Marketperform rating for the sector, global trade policy volatility and elevated interest rates have dampened growth prospects. Machinery demand is rising for gas infrastructure projects, benefiting firms like Caterpillar (CAT), but materials sub-sectors—particularly steel and copper—are constrained by tariffs and supply bottlenecks.

Investors seeking defensive plays in industrials should prioritize companies with international exposure and alignment with energy transition infrastructure. Schlumberger (SLB) and Baker Hughes (BKR), for instance, are leveraging high day rates in offshore projects and advancing carbon capture technologies. These firms offer a dual benefit: resilience to rate hikes and participation in long-term decarbonization trends.

Strategic Allocation in a Volatile Landscape

The interplay between energy and industrial sectors in 2025 demands a nuanced approach to sector rotation. Energy investors should focus on:
1. High-dividend, low-debt energy firms with exposure to LNG and NGLs.
2. Energy transition plays in hydrogen production and carbon capture, which are projected to attract $1.2 trillion in global investment by 2030.
3. Hedging strategies using oil futures to mitigate inflation risks in a stagflationary environment.

For industrials, the key is to align with gas infrastructure demand and energy transition technologies. Prioritize machinery firms with U.S. supply chain advantages and OFS players with international contracts. Avoid overexposure to materials sub-sectors facing tariff-driven cost pressures.

Conclusion: Balancing Income and Resilience

The U.S. rig count data is more than a snapshot of exploration activity—it is a lens through which to view the broader energy-industrial interplay. In a high-interest-rate environment, energy stocks offer a compelling combination of income, resilience, and long-term growth potential. Industrial conglomerates, while more volatile, present opportunities for those who can navigate trade policy risks and align with energy transition trends.

As the Federal Reserve's policy trajectory and geopolitical dynamics unfold, investors must remain agile. A strategic allocation to energy and select industrial sub-sectors can provide both defensive characteristics and growth potential in an era of macroeconomic uncertainty.