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What's the Falling US Crude Oil Rig Count Trying to Tell Us?

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Part 2
What's the Falling US Crude Oil Rig Count Trying to Tell Us? PART 2 OF 9

Oil and Gas Rigs Took the US Rig Count Down

US oil and gas rigs

According to Baker Hughes (BHI), in the week ending November 25, 2015, the total US rig count lost nine crude oil rigs, while the natural gas rig count fell by four. The crude oil rig count returned to its falling trend after rising briefly a few weeks ago. The natural gas rig count trend seems uncertain.

Oil and Gas Rigs Took the US Rig Count Down

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In the 12 months ending November 25, 2015, the total US crude oil and natural gas rig count fell by 1,173 or 61%. The number of active oil rigs fell by 1,017 or 65%. The number of natural gas rigs fell by 155, or ~45%, over this period.

Why rig count trends matter

Oil and gas 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 rise in the supplies in the months to come. In contrast, falling rig counts point to a potential stagnation in supplies.

Impact on energy companies

The 61% fall in the active rigs over the past year indicates a fall in exploration and production activity by upstream oil and gas companies. Falling natural gas rig counts over the past year would negatively impact natural gas compression service providers like Archrock (AROC).

The falling trend over the past year would also have a negative impact on Nabors Industries (NBR) because it provides drilling and rig services as well as completion and production services. Drill equipment makers like Schlumberger (SLB), National Oilwell Varco (NOV), and Halliburton (HAL) also suffer when the rig counts fall. Schlumberger forms 19.6% of the VanEck Vectors Oil Services ETF (OIH).

A lower rig count reduces the revenue for companies that provide oilfield services. Upstream companies reduce exploration and production activity. This pushes oil field service companies to take lower contract terms or day rates to save on costs.

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

In the next part of this series, we’ll take a deeper look at the impact of lower rig counts.

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