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What’s Driving the Weakness in US Rig Counts?

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Part 7
What’s Driving the Weakness in US Rig Counts? PART 7 OF 10

Did Horizontal Rigs Show Weakness in the Week to August 28?

Horizontal versus vertical rigs

According to oil service company Baker Hughes (BHI), the horizontal rig count decreased by five rigs in the week ended August 28, 2015, compared to the previous week’s count. This marked the first horizontal rig count drop after five weeks of consecutive increases. In the 12 months ended August 28, the number of horizontal rigs in operation fell by 658, or 49%. Currently, there are 672 active horizontal rigs, 700 fewer than the record high of 1,372 on November 21, 2014. This represents a fall of 51%. Horizontal rig counts repeatedly set and broke new records throughout 2014.

The number of vertical rigs in operation decreased by five to reach 125 last week. In the 12 months ended August 28, the number of vertical rigs fell by 249, or 67%. The number of directional rigs in operation increased by two in the week ended August 28.

Did Horizontal Rigs Show Weakness in the Week to August 28?

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The four-week average gain in horizontal rig counts was two for the week ended August 28. In comparison, the four-week average increase was eight for the week ended August 21. Four-week averages give a smoother view of this trend that otherwise can be quite volatile on a weekly basis.

Horizontal rigs and the shale boom

At the end of July 2015, the horizontal rig count was still up by ~95% compared to the count in January 2007. During this period, the number of active vertical rigs fell by ~88%. The rise in the number of horizontal rigs occurred in tandem with the US shale boom. Companies tap unconventional (shale) oil and gas reserves using a combination of horizontal drilling and hydrofracking. Vertical wells are typically used in conventional production.

How are energy companies affected?

Energy companies like Whiting Petroleum (WLL), ExxonMobil (XOM), Royal Dutch Shell (RDS.A), Marathon Oil (MRO), Pioneer Natural Resources (PXD), and Continental Resources (CLR) operate in unconventional resource shales. They use horizontal drilling extensively. A fall in the number of active horizontal rigs shows that these companies may be reducing horizontal drilling operations that drove the US shale boom. Whiting Petroleum accounts for 1.21% of the SPDR S&P Oil & Gas Exploration & Production ETF (XOP) and 0.27% of the Vanguard Energy ETF (VDE).

The shale boom also helped midstream MLPs like Magellan Midstream Partners (MMP), Crestwood Midstream Partners (CMLP), Buckeye Partners (BPL), and EQT Midstream Partners (EQM) boost their revenues over the last seven years.

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