Must-know: Why horizontal rigs at record highs is an important figure to watch

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Horizontal and vertical rigs both up last week

For the week ending August 1, 2014, the number of horizontal rigs increased by five to 1,298 from 1,293 a week ago. This also marks a record for the number of horizontal rigs. It broke the record set in the previous week ending July 25.Horizontal vs. Vertical rigs

Last week, the number of vertical rigs increased by 12 to 373 from 361 recorded a week ago. This was the first increase since the week ended July 3. The number of directional rigs decreased by 11 for the past week compared to the previous week. Year-to-date (or YTD), horizontal rigs are up by 13% at +150, while the vertical rigs are down 1% at -4.

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According to Baker Hughes, a horizontal well is a type of directional well in which the well surface location isn’t situated directly above the reservoir that it targets. When an inclination of a well exceeds 80 degrees from vertical, or when the lower part of the well runs parallel to the pay zone—that is, along the reservoir—it’s called horizontal well. Horizontal wells are drilled to increase the length of the well exposed to the reservoir in order to increase production.

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

The spurt in the number of horizontal rigs has been due to the discovery of a huge quantity of oil and gas in shale formations in the U.S. 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.

By the end of July, 2014, the number of horizontal rigs has increased by ~287% since January, 2007. During the same period, the number of vertical rigs has decreased by ~62%.

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The Permian Basin has the highest number of rigs in the U.S. The share of horizontal rigs in the Permian Basin has also increased substantially over time, along with the advent of new technologies like hydraulic fracturing. Out of its 555 rigs in the Permian as of August 1, 2014, 56% are horizontal, 39% are vertical, and ~5% are directional. In contrast, as of August 5, 2011, only ~19% of the rigs were horizontal versus ~78% vertical rigs. The share of directional rigs has remained almost unchanged.

Rig counts can be a useful indicator to gauge the upstream activity of companies such as Chevron (CVX) and EOG Resources (EOG), which are also part of the Energy Select Sector SPDR (XLE), as well as oil services companies such as Halliburton (HAL) and Schlumberger (or SLB), which are part of the Oil Services HOLDR s ETF (OIH).

Continue reading the next section in this series to learn about U.S. oil rig counts.

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