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Horizontal Rigs Take a U-Turn to Decline Again in Week of July 10

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Jul. 15 2015, Updated 1:06 p.m. ET

Horizontal versus vertical rigs

According to oil service company Baker Hughes (BHI), the horizontal rig count fell by three in the week ending July 10, 2015, compared to the previous week’s count. This week, the horizontal rig count went back to its declining trend after a brief rise in the previous week. In the 12 months ending July 10, the number of horizontal rigs in operation fell by 622, or 49%. Currently, there are 654 active horizontal rigs, 718 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 13 to reach 121 last week. In the 12 months ending July 10, the number of vertical rigs fell by 256, or 68%.

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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), ExxonMobil (XOM), Royal Dutch Shell (RDS.A), Marathon Oil (MRO), Pioneer Natural Resources (PXD), and Carrizo Oil & Gas (CRZO) operate in unconventional resource shales. They use horizontal drilling extensively. A fall in the number of active horizontal rigs shows that these companies are shying away from horizontal drilling operations that drove the US shale boom. Whiting Petroleum accounts for 1.62% of the SPDR S&P Oil & Gas Exploration & Production ETF (XOP).

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

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