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Horizontal Rigs Continued to Increase Last Week

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Horizontal versus vertical rigs

According to oil service company Baker Hughes (BHI), the horizontal rig count was up by one rig in the week ended August 21, 2015, compared to the previous week’s count. In the 12 months ended August 21, the number of horizontal rigs in operation fell by 644, or 49%. Currently, there are 677 active horizontal rigs, 695 fewer than the record high of 1,372 on November 21, 2014. This represents a fall of 51%. Horizontal rig counts repeatedly set and broke new records throughout 2014.

The number of vertical rigs in operation increased by three to reach 130 last week. In the 12 months ended August 21, the number of vertical rigs fell by 236, or 65%. The number of directional rigs in operation decreased by three in the week ended August 21.

The four-week average gain in horizontal rig counts was four for the week ended August 21. In comparison, the four-week average increase was seven for the week ended August 14. Four-week averages give a smoother view of this trend that otherwise can be quite volatile on a weekly basis.

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Horizontal rigs and the shale boom

At the end of July 2015, the horizontal rig count was still up by ~95% compared to the count in January 2007. During this period, the number of active vertical rigs fell by ~88%. The rise in the number of horizontal rigs occurred in tandem with the US shale boom. Companies tap unconventional (shale) oil and gas reserves using a combination of horizontal drilling and hydrofracking. Vertical wells are typically used in conventional production.

How are energy companies affected?

Upstream energy companies like Whiting Petroleum (WLL), ExxonMobil (XOM), Royal Dutch Shell (RDS.A), Marathon Oil (MRO), Pioneer Natural Resources (PXD), and Continental Resources (CLR) operate in unconventional resource shales. They use horizontal drilling extensively. A rise in the number of active horizontal rigs shows that these companies are again escalating horizontal drilling operations that drove the US shale boom. Whiting Petroleum accounts for 0.88% of the SPDR S&P Oil & Gas Exploration & Production ETF (XOP) and 0.25% of the Vanguard Energy ETF (VDE).

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

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