uploads/2015/07/Total-US-rig-count21.jpg

US Rig Counts Decrease Again: What’s the Impact?

By

Updated

Total US rig count

According to oilfield service company Baker Hughes (BHI), there were 857 active oil and gas rigs in the United States in the week ended July 17, 2015. This total is six fewer rigs than in the previous week, which ended July 10. After rising for three weeks in a row, US rigs decreased again. Until the week ended June 19, the US rig count had fallen consecutively for 28 weeks.

With last week’s fall, the average four-week US rig count is now unchanged versus an average rise of one rig in the previous four weeks, ended July 10. Four-week averages offer a smoother view of this trend, which is otherwise quite volatile on a weekly basis.

Article continues below advertisement

Rig counts in perspective

The US rig count experienced an uptrend throughout most of 2014. However, that trend reversed with 28 consecutive weeks of falling rig counts until the week ended June 19. The US rig count is still at its lowest level since January 2003.

June’s average rig count of 861 represents a fall of 28 from the 889 active rigs in May. In comparison, May’s rig count fell by 87 from April. So the monthly rate of rig count decreases has also been falling.

The US overall rig count hit 2,031 in September 2008—the highest since July 1987, according to Baker Hughes. In September 2014, the average rig count came close to that record. It reached 1,931. Since then, ~56% of the rigs have been idled.

Impact on energy companies

Energy companies including Encana (ECA), Linn Energy (LINE), SM Energy (SM), Carrizo Oil & Gas (CRZO), and Newfield Exploration (NFX) have upstream operations. A falling rig count typically indicates decreasing exploration and development activities by these upstream companies. This could lead to lower energy production.

Upstream MLPs like Memorial Production Partners (MEMP), Legacy Reserves (LGCY), Eagle Rock Energy Partners (EROC), Atlas Resource Partners (ARP), and Vanguard Natural Resources (VNR) could also be negatively affected by decreased drilling.

However, falling production could push energy prices higher, which could push rig counts higher. We’ll study this relationship in more detail later in this series.

SM Energy accounts for 1.4% of the SPDR S&P Oil & Gas Exploration & Production ETF (XOP). Carrizo Oil & Gas accounts for 0.13% of the iShares U.S. Energy ETF (IYE).

Advertisement

More From Market Realist