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What Does the Highest Horizontal Rig Count Drop in 4 Months Mean?

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Sep. 11 2015, Published 10:36 a.m. ET

Horizontal versus vertical rigs

According to oil service company Baker Hughes (BHI), the horizontal rig count decreased by 13 rigs in the week ended September 4, 2015, compared to the previous week’s count. This marked the highest horizontal rig count drop since May 2015. In the 12 months ended September 4, the number of horizontal rigs in operation fell by 674, or 51%. Currently, there are 659 active horizontal rigs, 713 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 decreased by five to reach 120 last week. In the 12 months ended September 4, the number of vertical rigs fell by 248, or 67%. The number of directional rigs in operation increased by five in the week ended September 4.

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The four-week average loss in horizontal rigs was three for the week ended September 4. In comparison, the four-week average increase was two for the week ended August 28. Four-week averages give a smoother view of this trend that otherwise can be quite volatile on a weekly basis. So, even on a smoothed basis, it looks like horizontal rigs are taking a turn for the worse.

Horizontal rigs and the shale boom

At the end of August 2015, the horizontal rig count was still up by ~101% compared to the count in January 2007. During this period, the number of active vertical rigs fell by ~87%. 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?

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 fall in the number of active horizontal rigs shows that these companies may be reducing horizontal drilling operations that drove the US shale boom. Whiting Petroleum accounts for 0.93% of the SPDR S&P Oil & Gas Exploration & Production ETF (XOP) and 0.27% 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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