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What’s Driving the Weakness in US Rig Counts?

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Part 2
What’s Driving the Weakness in US Rig Counts? PART 2 OF 10

Natural Gas Rigs Crashed Last Week, but Crude Oil Rigs Rose

Crude oil and natural gas rigs

According to Baker Hughes (BHI), in the week ended August 28, the US rig count increased by one crude oil rig, while the natural gas rig count decreased by nine. Crude oil rig counts have kept increasing in the past few weeks, while the natural gas rig count has been volatile.

In the 12 months ended August 28, the total US crude oil and natural gas rig count fell by 1,037, or 54%. The number of active oil rigs fell by 900, or 57%. The number of natural gas rigs fell by 136, or ~40%, over this period.

Natural Gas Rigs Crashed Last Week, but Crude Oil Rigs Rose

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Why rig count trends matter

Rig counts tell us how many rigs are actively drilling for oil and gas. Analyzing the change in the number of active rigs can help us understand how long-term supply could evolve. Oil and gas rig counts signal how confident producers are about drilling for oil and gas.

Rising rig counts could indicate a potential increase in supplies in the months to come. In contrast, falling rig counts point to a potential stagnation in supplies.

Effect on energy companies

The 54% fall in active rigs in the past year indicates a fall in exploration and production activity by upstream oil and gas companies. Apart from upstream energy companies, falling natural gas rig counts over the past year would negatively affect natural gas compression services providers like Exterran Holdings (EXH) and Exterran Partners (EXLP).

The falling trend over the past year would also negatively affect Dresser-Rand Group (DRC), which provides equipment for oil and gas transportation. Drill equipment makers like Schlumberger (SLB) and Halliburton (HAL) also suffer if rig counts decrease. A lower rig count should reduce oilfield service companies’ revenue, as upstream companies reduce exploration and production activity and push oilfield service companies for lower contract terms or day rates to save on costs. Schlumberger forms 23.6% of the VanEck Vectors Oil Services ETF (OIH).

Lower crude oil and natural gas production could negatively affect midstream energy MLPs like Williams Partners (WPZ), Energy Transfer Partners (ETP), MarkWest Energy Partners (MWE), and Enbridge Energy Partners (EEP) due to lower volumes.

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