Why do horizontal versus vertical rig counts matter?

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Horizontal rigs went up and vertical rigs went down

For the week ending July 11, 2014, the number of horizontal rigs increased by eight to 1,276 from 1,268 a week ago. However, the number of vertical rigs decreased to by seven to 377 from 384 recorded last week. Year-to-date (or YTD), horizontal rigs are up by 11%, +128, while the vertical rigs are unchanged.

 

US Hozontal, verical and directional rig

A horizontal well is a type of directional well. Horizontal wells are drilled to increase the length of the well. When an inclination of a well exceeds 80 degrees from vertical, or when the lower part of the well bore parallels the pay zone, it’s called a horizontal well.

In vertical drilling, a well is drilled straight down into the earth until it reaches the formation being developed. Then the well is completed and starts producing oil or natural gas.

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The two different drilling techniques of horizontal and vertical drilling are used to explore and develop oil and natural gas properties. According to Baker Hughes, horizontal drilling has become the more popular form of drilling over the past few years in the United States. By the end of June, 2014, the number of horizontal rigs has increased by ~280% since January, 2007. During the same period, the number of vertical rigs has decreased by ~62%.

The increase in the number of horizontal rigs has been due to the discovery of huge quantity of oil and gas in shale formations in the U.S. The application of this type of drilling, in combination with hydraulic fracturing of unconventional oil and gas formations, has led to the development and production of large amounts of oil and natural gas in the United States.

Rig counts can be a useful indicator to gauge the activity levels of oilfield service companies such as Baker Hughes (BHI), Halliburton (HAL), and Schlumberger (SLB)—all of which are part of the Oil Services HOLDR s ETF (OIH) and the Energy Select Sector SPDR (XLE).

Continue reading the next sections in this series to learn about U.S. oil and natural gas rig counts.

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