Why the horizontal rig count broke a record again

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Horizontal rig counts increased

For the week ending November 14, 2014, the number of horizontal rigs increased by seven from the previous week’s count. Currently, there are 1,369 horizontal rigs. This marks the highest horizontal rig count on record. Horizontal rig counts have repeatedly set and broken new records throughout the year.

Horizontal vs. Verical rig count

Last week, the number of vertical rigs decreased by six to 354—compared to 360 the previous week. The number of directional rigs also increased by two.

Year-to-date (or YTD), horizontal rigs are up 221, or 19%. Vertical rigs are down by 23.

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Types of rigs

According to Baker Hughes, a horizontal well is a directional well. 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. This increases production. In vertical drilling, a well goes straight down until it reaches the formation.

Horizontal rigs increased

The number of horizontal rigs increased when large quantities of oil and gas in shale formations were discovered in the US. Oil companies combined horizontal drilling and hydraulic fracturing. As a result, they can access unconventional oil and gas formations and increase oil and natural gas production.

By the end of October 2014, the number of horizontal rigs increased by ~304%—compared to January 2007. During the same period, the number of vertical rigs decreased by ~63%. Vertical rigs are on a long-term downward trend.

Key stocks and exchange-traded funds (or ETFs)

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

Rig counts also gauge oilfield service companies’ upstream activity. Oilfield service companies include Halliburton (HAL) and Baker Hughes Incorporated (BHI). These companies are part of the VanEck Vectors Oil Services ETF (OIH). Read “A key guide to Halliburton’s 3Q14 earnings” to learn more.

The total U.S. onshore rig count is going strong. Recently, it reached a two-year high. To find out where the growth is coming from, read the next part of this series.

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