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What’s the Impact of the Third Weekly US Rig Rise in a Row?

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Total US rig count

According to oilfield service company Baker Hughes (BHI), there were 863 active oil and gas rigs in the US in the week ending July 10, 2015, which is one more than the previous week ending July 2. This marked a rise in rigs for the third week in a row. Until the week ending June 19, the US rig count had fallen consecutively for 28 weeks.

With last week’s rise, the average four-week US rig count rise is now at one, in contrast to a two count fall in the previous four weeks ending July 2. Four-week averages give a smoother view of the trend that’s otherwise quite volatile on a weekly basis.

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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 ending June 19. Despite recent rises, 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 falls has also been decreasing.

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, ~55% 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 rising rig count typically indicates rising exploration and development activities by these upstream companies. This could lead to higher energy production in the future.

Upstream MLPs (master limited partnerships) like Memorial Production Partners (MEMP), Legacy Reserves (LGCY), Eagle Rock Energy Partners (EROC), Atlas Resource Partners (ARP), and Vanguard Natural Resources (VNR) could also gain from increased drilling.

However, rising production could pressure energy prices lower, which could drag rig counts lower. We’ll study this relationship in more detail later.

SM Energy accounts for 1.7% 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).

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