US Rig Count Dropped Last Week: What’s the Impact?
Total US rig count
According to oilfield service company Baker Hughes (BHI), there were 877 active oil and gas rigs in the United States in the week ended August 28, 2015. This is eight less than the previous week, which ended August 21. With last week’s loss, the US rig count went back into a declining trend. Until the week ended June 19, 2015, the US rig count had fallen consecutively for 28 weeks. Since then, the US rig count has recovered 2% despite last week’s loss.
The four-week average gain in US rig counts was one for the week ended August 28. In comparison, the four-week average increase was two for the week ended August 21. Four-week averages offer a smoother view of this trend, which is otherwise quite volatile on a weekly basis.
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Rig counts in perspective
The US rig count experienced an uptrend throughout most of 2014. However, that trend reversed with 28 consecutive weeks of falling rig counts until the week ended June 19. Despite recent rises, the US rig count is still at its lowest level since June 2009.
July’s average rig count of 866 represents a rise of five from the 861 active rigs in June. In comparison, June’s rig count fell by 28 from May. The monthly drop in rigs in 2015 reversed in July.
The US overall rig count hit 2,031 in September 2008, the highest since July 1987, according to Baker Hughes. In September 2014, the average rig count came close to that record. It reached 1,931. Since then, ~55% of the rigs have been idled.
Impact on energy companies
Energy companies like Encana Corporation (ECA), WPX Energy (WPX), SM Energy (SM), Concho Resources (CXO), and RSP Permian (RSPP) have upstream operations. A falling rig count typically indicates decreasing exploration and development activities by these upstream companies. This could lead to lower energy production.
Upstream MLPs like Memorial Production Partners (MEMP), Legacy Reserves (LGCY), Eagle Rock Energy Partners (EROC), Atlas Resource Partners (ARP), and Vanguard Natural Resources (VNR) could also suffer from decreased drilling.
However, lower production could push energy prices higher, which could eventually pull rig counts higher. We’ll study this relationship in more detail later in this series.