Why the horizontal rig count is the highest on record

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Horizontal rig counts are up and vertical rig counts are down

For the week ended October 24, 2014, the number of horizontal rigs increased by two from the previous week’s count and currently stands at 1,355. This remains the highest horizontal rig count on record. Horizontal rig counts have repeatedly set and broken new records throughout this year.Horizontal vs Vertical rigs

Last week, the number of vertical rigs decreased by one to 361, compared to 362 the previous week. The number of directional rigs increased by eight compared to the previous week.

In the year to date, horizontal rigs are up 18%, or +207. Vertical rigs are down 16.

Types of rigs

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According to Baker Hughes, a horizontal well is a directional well where the well surface isn’t situated directly above the reservoir that it targets. When the well’s inclination is more than 80 degrees from vertical, or when the lower part of the well runs parallel to the pay zone along the reservoir, it’s a horizontal well.

Horizontal wells increase the length of the well that’s exposed to the reservoir, which in turn increases production. In vertical drilling, a well goes straight down until it reaches the formation.

Horizontal rigs are sharply up

The number of horizontal rigs increased when large quantities of oil and gas in shale formations were discovered in the U.S. Oil companies combine horizontal drilling and hydraulic fracturing to access unconventional oil and gas formations and increase oil and natural gas production.

By the end of September 2014, the number of horizontal rigs increased by ~300%, compared to in January 2007. During the same period, the number of vertical rigs decreased by ~62%. Vertical rigs are on a long-term declining trend.

Key stocks and ETFs

Rig counts can gauge companies’ upstream activity. Companies like Halcon Resources (HK) and Anadarko Petroleum (APC) are part of the Energy Select Sector SPDR (XLE).

Rig counts also gauge oilfield service companies’ upstream activity. Oilfield service companies include Halliburton Company (HAL) and Baker Hughes (BHI). These companies are part of the VanEck Vectors Oil Services ETF (OIH).

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