U.S. Oil Rigs Hit 5-Year Low as Shale Peaks and Rigs Fall

The U.S. Baker Hughes Oil Rig Count for December 2025 has plunged to 406 rigs, the lowest level since January 2021, underscoring a structural shift in the energy sector. This figure, 77 rigs below the 2024 year-ago level, reflects a broader industry contraction driven by weak oil prices, improved drilling efficiencies, and underinvestment in upstream projects. The Permian Basin, which accounts for nearly half of U.S. oil rigs, now operates at 246 rigs—a 26% year-over-year decline and the lowest since August 2021. While this data aligns with bearish consensus expectations, the magnitude of the drop highlights a critical inflection point: U.S. shale production has peaked, and a sustained decline is now inevitable.

Sectoral Divergence: Winners and Losers in the Energy Value Chain

The energy sector's performance in 2025 reveals stark divergence across subsectors, with operators prioritizing capital discipline and downstream leverage over upstream expansion. This divergence offers tactical opportunities for investors seeking to reallocate assets in a low-price environment.

1. Refiners: Capitalizing on Volatility
Refiners have emerged as the sector's standout performers, with the “Big Three”—Marathon Petroleum (MPC), Valero (VLO), and Phillips 66 (PSX)—delivering an average return of 24.6% in 2025. Valero's 37.0% gain underscores the sector's ability to thrive in volatile markets, leveraging strong balance sheets and efficient operations to profit from price swings.

2. Integrated Majors: Balancing Act
Integrated oil giants like ExxonMobil (XOM) and Chevron (CVX) posted double-digit gains (16.0% and 10.1%, respectively), while foreign supermajors such as TotalEnergies (TTE) and BP (BP) surged by 28.3% and 24.5%. Their diversified operations cushioned the blow of weaker oil prices, though upstream exposure still limited their upside compared to refiners.

3. Midstream: Fee-Based Resilience
Midstream companies, including NGL Energy Partners (NGL), which gained 100.4% in 2025, continue to outperform. With 39 of 40 midstream firms ending the year in positive territory, their fee-based revenue models and stable cash flows make them attractive in a low-growth environment.

4. E&P: A Struggling Segment
Pure exploration and production (E&P) companies lagged, with the average upstream stock declining 3.0% for the year. ConocoPhillips (COP) fell 2.3%, while Canadian producers like Suncor (SU) bucked the trend with a 29.7% gain. The sector's struggles reflect the depletion of low-cost resources and the industry's shift toward capital preservation.

Strategic Asset Reallocation: Positioning for 2026

The rig count data and sectoral performance suggest a clear path for investors: overweight refiners and midstream infrastructure while underweighting pure E&P plays.

1. Refiners and Integrated Majors: Defensive Plays
With U.S. crude production projected to decline to 13.3 million barrels per day by 2026 (from a peak of 13.5 million in 2025), refiners are well-positioned to benefit from refining margins and volatility. Integrated majors, meanwhile, must balance shareholder returns with disciplined capital spending to sustain performance.

2. Midstream: Income and Stability
Midstream firms offer a compelling income stream, with MLPs like NGL Energy Partners providing yields exceeding 8%. As U.S. natural gas exports rise and AI-driven demand for energy infrastructure grows, midstream operators are poised to maintain fee-based cash flows.

3. E&P: Selective Opportunities
While the E&P sector faces headwinds, select Canadian producers and companies with high-productivity acreage (e.g., Diamondback Energy in the Permian) may offer value. However, investors should prioritize firms with strong balance sheets and low leverage.

4. Natural Gas and Clean Energy: Emerging Trends
Natural gas is gaining traction as a transition fuel, with EIA projecting a 63% price rebound in 2025. Additionally, nuclear energy stocks have surged due to AI-driven power demand and policy tailwinds, offering long-term growth potential.

Conclusion: Navigating the New Energy Landscape

The U.S. oil rig count's collapse signals the end of the shale boom's growth phase and the rise of a capital-efficient energy sector. Investors must adapt by focusing on subsectors with durable cash flows, operational flexibility, and alignment with global energy transitions. As the market anticipates a potential oil price rebound in 2026, tactical positioning in refiners, midstream infrastructure, and natural gas could yield outsized returns.

In this evolving landscape, the key to success lies not in chasing commodity prices but in understanding the structural shifts reshaping the energy value chain. By reallocating assets toward resilient subsectors, investors can navigate the current downturn and position for a more sustainable energy future.