Why you should monitor record-breaking horizontal rig counts
Horizontal and vertical rigs both up last week
For the week ending August 8, 2014, the number of horizontal rigs increased by 19 to 1,317 from 1,298 a week ago. This also marks a record for the number of horizontal rigs. This total also broke the record set in the previous week ending August 1. This is the eighth consecutive week that horizontal rig counts have increased.
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Last week, the number of vertical rigs increased by five to 378 from the 373 recorded a week ago. This was the second consecutive weekly increase in vertical rigs. The number of directional rigs decreased by five for the past week compared to the previous week.
Year-to-date, horizontal rigs are up 15% at +169, while the vertical rigs are almost unchanged at +1.
According to Baker Hughes, a horizontal well is a type of directional well in which the well surface location isn’t situated directly above the reservoir that it targets.
When the inclination of a well exceeds 80 degrees from vertical, or when the lower part of the well runs parallel to the pay zone—that is, along the reservoir—it’s called a horizontal well. Horizontal wells are drilled to increase the length of the well exposed to the reservoir in order to increase production.
In vertical drilling, a well is drilled straight down into the earth until it reaches the formation being developed.
The spurt in the number of horizontal rigs has been due to the discovery of huge quantities of oil and gas in shale formations in the U.S. Application of this type of drilling in combination with hydraulic fracturing of these unconventional oil and gas formations has led to the recent surge in production of oil and natural gas in the United States.
By the end of July 2014, the number of horizontal rigs increased ~287% from January 2007. During the same period, the number of vertical rigs decreased ~62%.
The Permian Basin
The Permian Basin has the highest number of rigs in the U.S. Out of the 560 rigs in the Permian as of August 8, 2014, 56% are horizontal, 39% are vertical, and ~5% are directional.
In contrast, as of August 12, 2011, only ~19% of the rigs were horizontal versus ~78% vertical rigs. The share of directional rigs has increased marginally by 1% during the period.
Why follow rig counts?
Rig counts can be a useful indicator for you to gauge the upstream activity of companies like Chevron (CVX) and EOG Resources (EOG), which are part of the Energy Select Sector SPDR (XLE). Rig counts also help you assess oilfield service companies like Halliburton (HAL) and Schlumberger (or SLB), which are part of the VanEck Vectors Oil Services ETF (OIH).
Read the next part of this series to learn about U.S. oil rig counts.