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Horizontal Rigs Rise after 8 Months: Shale Juggernaut Revived?

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Horizontal versus vertical rigs

According to oil service company Baker Hughes (BHI), the horizontal rig count rose by three in the week ending July 2, 2015—compared to the previous week’s count. This is the first rise in horizontal rigs in eight months. In the 12 months ending July 2, the number of horizontal rigs in operation fell by 611, or 48%. Currently, there are 657 active horizontal rigs—715 fewer than the record high of 1,372 on November 21, 2014. This represents a fall of 52%. Horizontal rig counts repeatedly set and broke new records throughout 2014.

The number of vertical rigs in operation rose by one to reach 108 last week. In the 12 months ending July 2, the number of vertical rigs fell by 276, or 72%.

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Horizontal rigs and the shale boom

At the end of June 2015, the horizontal rig count was still up by ~98%—compared to the count in January 2007. During this period, the number of active vertical rigs fell by ~90%. 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.

How are energy companies impacted?

Upstream energy companies like Whiting Petroleum (WLL), Marathon Oil (MRO), Pioneer Natural Resources (PXD), and Carrizo Oil & Gas (CRZO) operate in unconventional resource shales. They use horizontal drilling extensively. A rise in horizontal rigs shows that these companies are returning to horizontal drilling operations that drove the US shale boom.

The shale boom also helped midstream MLPs (master limited partnerships) like Magellan Midstream Partners (MLP), Crestwood Midstream Partners (CMLP), Natural Resource Partners (NRP), Buckeye Partners (BPL), and EQT Midstream Partners (EQM) boost their revenue over the last seven years.

Whiting Petroleum accounts for 1.28% of the SPDR S&P Oil & Gas Exploration & Production ETF (XOP). Marathon Oil accounts for 1.38% of the Energy Select Sector SPDR ETF (XLE).

Rising drilling activity also adds to OFS (oilfield service) companies’ revenue. This will be positive for MLP OFS companies like Exterran Partners (EXLP). OFS companies provide various drilling-related services and technologies.

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