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Why Are Energy Companies Affected by Falling Rig Counts?

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Rig counts fell last week

In the week ending June 19, the US rig count fell by four active crude oil rigs, partially offset by two natural gas rig additions. In the 12 months to June 19, the total US crude oil and natural gas rig count fell by 1,001, or 54%. The number of active oil rigs fell by 914, or 59%. The number of natural gas rigs fell by 88, or ~28%, over this period. The total rig count rose by 99 for the same period ending June 20, 2014.

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Rig count trend and why it matters

Rig counts tell us how many rigs are actively drilling for oil and gas. Analyzing the change in the number of active rigs can help us understand how long-term supply could evolve. Oil and gas rig counts signal how confident producers are about drilling for oil and gas.

A rise in rigs points to an increased production in the future. In contrast, falling rigs point to a potential stagnation in supplies. A particularly sharp fall in rigs, like the one we’ve been witnessing over the last few months, could even mean a fall in the production of oil and gas in the months to come. Lower crude oil and natural gas production will also negatively affect midstream energy MLPs (master limited partnerships) like Williams Partners (WPZ), Energy Transfer Partners (ETP), MarkWest Energy Partners (MWE), Enbridge Energy Partners (EEP), and Enlink Midstream Partners (ELNK).

The 54% fall in active rigs indicates a fall in exploration and production activity by upstream oil and gas companies. Apart from upstream oil and gas producers, the falling rig count will also negatively impact oilfield service companies, including Exterran Holdings (EXH), Exterran Partners (EXLP), Superior Energy Services (SPN), Dresser-Rand Group (DRC), and Oceaneering International (OII). Oceaneering International forms 2.5% of the VanEck Vectors Oil Services ETF (OIH).

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