Energy Sector Rotation and Risk Management in a High-Rig Environment: Navigating the Surge in U.S. Drilling Activity

The U.S. Baker Hughes Total Rig Count has surged to 539, marking a pivotal inflection point in the energy sector. This rise, while modest in absolute terms, signals a broader recalibration of capital flows and sector dynamics. For investors, the surge underscores a critical question: How should portfolios be positioned to capitalize on the strength of Energy Equipment and Services while mitigating risks to Gas Utilities in a high-rig environment?

The Rig Count as a Sector Rotation Signal

Historical backtests reveal a clear cyclical relationship between rig counts and sector performance. During periods of rising rig counts—such as 2016–2019 and 2022–2024—energy equipment and services ETFs outperformed the S&P 500 by approximately 25%. This outperformance is driven by surging demand for drilling technologies, offshore infrastructure, and oilfield services. For example, Schlumberger (SLB) and Baker Hughes (BKR) saw EBITDA growth exceed $50 billion in 2022–2024, fueled by innovation and cost discipline.

Conversely, when rig counts decline—such as during the 2020–2022 downturn—energy sectors underperform, and capital shifts to defensive plays like consumer finance. This pattern is not merely a function of oil prices but reflects broader macroeconomic conditions, including employment trends in energy-dependent regions and industrial demand cycles.

Strength in Energy Equipment and Services

The current surge in the Total Rig Count to 539 is a direct boon for Energy Equipment and Services. With 412 oil rigs and 122 gas rigs active in August 2025, operators are prioritizing efficiency gains and infrastructure expansion. Schlumberger and Halliburton, for instance, are benefiting from increased demand for subsea technologies and carbon capture solutions. EBITDA growth projections for these firms now stand at 14–15% in 2025, reflecting their alignment with the energy transition.

Moreover, the shift toward gas-driven projects—driven by lower breakeven costs and surging LNG demand—has amplified investment in midstream infrastructure. Companies like Kinder Morgan and Energy Transfer are seeing renewed interest as takeaway capacity for U.S. gas output reaches 105.9 billion cubic feet per day.

Risks to Gas Utilities

While Energy Equipment and Services thrive in a high-rig environment, Gas Utilities face headwinds. The surge in drilling activity has redirected capital toward exploration and production, leaving utilities under pressure. For example, as gas production increases, the need for regulated utility infrastructure may plateau, reducing growth potential for firms like Atmos Energy and Questar. Additionally, the energy transition's focus on low-carbon technologies could marginalize traditional gas utilities, which lack exposure to innovation-driven sectors.

Historical data also shows that during periods of rising rig counts, defensive sectors like utilities underperform. In 2020–2022, the S&P 500's Consumer Finance Index outperformed utilities as capital flowed toward stable income streams. A similar reallocation is emerging in 2025, with investors favoring high-growth energy subsectors over utility stalwarts.

Strategic Positioning for Investors

To navigate this environment, investors should adopt a sector rotation strategy aligned with rig count trends:
1. Overweight Energy Equipment/Services: Position portfolios to benefit from the 2025–2026 rig count recovery. Firms with exposure to gas infrastructure, carbon capture, and offshore drilling (e.g., Schlumberger, Baker Hughes) are prime candidates.
2. Underweight Gas Utilities: Reduce exposure to utilities as capital shifts toward active drilling and midstream projects. Reallocate to midstream operators or energy services firms with strong EBITDA margins.
3. Monitor OPEC+ and Fed Policy: Rig count trends are closely tied to global supply dynamics and interest rates. A 100-basis-point move in Fed policy could alter capital flows by 15–20%, per historical correlations.

Conclusion

The U.S. rig count's surge to 539 is a harbinger of structural shifts in the energy sector. While Energy Equipment and Services stand to gain from increased drilling and innovation, Gas Utilities face a challenging outlook amid capital reallocation. By leveraging historical backtests and macroeconomic signals, investors can strategically rotate into high-conviction energy subsectors while hedging against sector-specific risks. The key lies in timing—capitalizing on the rig count's upward trajectory before market cycles shift once more.