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Rig count declines across the board, slows energy companies

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Rig numbers of all types are down

The horizontal rig count decreased by 51 from the previous week’s count, representing the 15th straight weekly fall. Currently, there are 895 horizontal rigs, which is 477 less than the record high of 1,372 reached on November 21, 2014. Horizontal rig counts repeatedly set and broke new records throughout 2014.

All types of rig counts declined last week. The number of vertical rigs declined by 17 to 177, and the number of directional rigs fell by seven. In the past year, horizontal rigs fell by 286, and vertical rigs are down by 214.

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What’s a horizontal well?

Oilfield service company Baker Hughes (BHI) notes that a horizontal well, or a directional well, has a surface that isn’t situated directly above the reservoir it targets. A horizontal well’s inclination is either more than 80 degrees from vertical, or the lower part of the well can run parallel to the pay zone along the reservoir.

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

Rig counts can gauge a company’s upstream activity. Hess Corporation (HES) and Apache Resources (APA) are two upstream companies. Together, they make up 3.2% of the SPDR S&P Oil & Gas Exploration & Production ETF’s (XOP) market capitalization.

Horizontal rigs increased in 2014

The number of horizontal rigs spiked in the United States when large quantities of oil and gas were discovered in shale formations. Oil companies combined hydraulic fracturing with horizontal drilling, which allowed them to increase oil and natural gas production by accessing unconventional oil and gas formations.

By the end of February 2015, the horizontal rig count increased by ~201%, compared to the number of rigs in January 2007. During the same period, the number of vertical rigs decreased by ~44%, indicating a long-term downward trend.

Upstream energy companies are trimming their spending plans for 2015, which may reduce shale oil and gas production. Read Market Realist’s series Is a crude oil price trend forcing energy companies to bite the bullet? to learn about upstream companies’ plans to reduce their capital expenditures.

Rig counts gauge oilfield service companies’ upstream activity. Oilfield service companies include Weatherford International (WFT) and Schlumberger (SLB), which are part of the VanEck Vectors Oil Services ETF (OIH). Weatherford International and Schlumberger together account for 23.5% of OIH’s market capitalization.

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