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Is the Horizontal Rig Count Bottoming Out?

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Horizontal rig count is down

According to oil service company Baker Hughes (BHI), the horizontal rig count fell by two in the week ending May 22, 2015—compared to the previous week’s count. This represents 26 weeks of a consecutive decline. In the 12 months ending May 22, 2015, the number of horizontal rigs in operation fell by 560.

Currently, there are 683 active horizontal rigs—689 fewer than the record high of 1,372 reached on November 21, 2014. This represents a 50% decline. Horizontal rig counts repeatedly set and broke new records throughout 2014.

The number of vertical rigs in operation increased by three to 117 last week. In the 12 months ending May 22, 2015, the number of vertical rigs fell by 292.

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Horizontal rigs are used more for unconventional reserves

At the end of April 2015, the horizontal rig count was still up by ~118%—compared to the count in January 2007. During the same period, the number of active vertical rigs decreased by ~88%. The rise in the number of horizontal rigs occurred in tandem with the US shale boom. Unconventional, or shale, oil and gas reserves are tapped using a combination of horizontal drilling and hydrofracking. Vertical wells are typically used in conventional production.

Upstream energy companies like Whiting Petroleum (WLL), Marathon Oil (MRO), and Carrizo Oil & Gas (CRZO) operate in the unconventional resource shales, where horizontal drilling is used extensively. A drop in horizontal rigs shows that these companies are slowing the drilling operations that drove the US shale boom.

Carrizo Oil & Gas accounts for 1.27% of the SPDR S&P Oil & Gas Exploration & Production ETF (XOP). Whiting Petroleum accounts for 0.41% of the iShares US Energy ETF (IYE).

Falling rig count also affects oilfield service companies

Oilfield service companies provide various drilling-related services and technologies. Falling drilling activity reduces oilfield service companies’ revenue. In these situations, upstream companies push for cheaper contract terms or day rates.

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