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Rig count continues to fall: When will coal benefit?

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Mar. 4 2015, Published 3:31 p.m. ET

Rig count

A drilling rig is a machine that’s used to dig a hole into the earth’s surface. Rigs are used to drill oil and natural gas wells. Rigs can be set up onshore and offshore. The onshore rigs are usually moved once a well is drilled. Offshore rigs are more permanent. The higher the gas rig count, the higher the future natural gas production.

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Natural gas rig count falls

The natural gas rig count dropped for the fourth straight week. It dropped for the week ending February 27. According to Baker Hughes, an oilfield services company, the natural gas rig count fell to 280 on February 27—compared to 280 on February 20 and 335 last year. The number of oil rigs, that also produce some natural gas, continued to fall. The oil rigs dropped below to 986 on February 27. There were 33 less oil rigs—compared to 1,019 on February 20.

What does this mean?

The natural gas rig count represents producers’ sentiments. If producers expect cooler winters, the rig count will likely increase as producers drill more wells. An increasing natural gas rig count in a stable demand environment is a negative indicator for coal producers (KOL)—like Alpha Natural Resources (ANR), Arch Coal (ACI), Peabody Energy (BTU), and Alliance Resource Partners (ARLP). However, a decrease in the rig count may not be positive for coal producers. All of the major coal producers are part of the iShares Russell 3000 ETF (IWV).

While the natural gas rig count fell for the last three years, production is rising. It’s important to note that oil wells also produce some natural gas.

What about oil prices? We’ll discuss oil prices in the next part of this series.

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