US horizontal versus vertical rigs
According to oil service company Baker Hughes (BHI), the US horizontal rig count fell by eight in the week ending September 18—compared to the previous week’s count. This marked the fourth consecutive weekly fall in the horizontal rig count. In the 12 months ending September 18, the number of horizontal rigs in operation fell by 701 or 52%. Currently, there are 640 active horizontal rigs. This is 732 less than the record high of 1,372 on November 21, 2014. This represents a fall of 53%. Horizontal rig counts repeatedly set and broke new records throughout 2014.
The number of vertical rigs in operation didn’t change last week. They stayed at 119. In the 12 months ending September 18, the number of vertical rigs fell by 259 or 69%. The number of directional rigs in operation rose by two in the week ending September 18.
The four-week average loss in horizontal rigs was nine for the week ending September 18. In comparison, the four-week average fall was seven for the week ending September 11. Four-week averages give a smoother view of this trend, which can otherwise 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, or 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 impacted?
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 could be reducing the horizontal drilling operations that drove the US shale boom. Whiting Petroleum accounts for 0.94% 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 revenue over the last seven years.