If rig permits are a leading indicator of domestic land-drilling activity, as they historically have been, then look for an uptick in the U.S. rig count in second-half 2007.

A recent report by Raymond James & Associates indicates that, after declining 40% from October 2006 through mid-January 2007, the subsequent domestic land-rig permit count through late April has rebounded 70%.

What caused this? For one thing, the persistence of colder weather-off and on even in April-has kept the 12-month gas-futures strip north of $8 for quite some time now.

"Our belief continues to be that, at strip pricing above [that level], every land rig that can work, will be working," says J. Marshall Adkins, Houston-based director of equity research for the investment-banking firm. "Thus, as operators begin to adjust their thinking to this higher pricing curve versus a quarter ago, we suspect that drilling activity levels will start to ramp back up during the second half of this year."

Accordingly, the Raymond James analyst team has revised its 2007 U.S. rig-count forecast upward to 1,785. This represents a 12% increase from a prior, early-January estimate of 1,600 for 2007 and an 8% increase versus the 2006 average rig count.

The outlook for land-drilling dayrates and margins? "Given the rather shallow decline in drilling activity, the perception of a short-lived downturn and increased consolidation during the past decade, dayrates for land drillers have not fallen all that much compared to other recent downturns," observes Adkins.

While he fully expects greater volatility with respect to leading-edge dayrates and margins, the analyst believes the recorded fleet average dayrates and margins by the publicly traded land drilling contractors will fall by less.

"On average, we would suggest-and have modeled-a decline in [land] fleet average dayrates this year of 10% to 15%, which corresponds to a decline in fleet average margins of 15% to 20%."

Adkins adds that he has been hearing anecdotally that land drillers are now finding support and that rig prices are beginning to stabilize. "So if you're an E&P company, now is the time to take advantage of the dip in dayrates before they go back up in 2008."

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