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Is the US Horizontal Rig Count Starting to Look Weak Again?

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US horizontal versus vertical rigs

According to oil service company Baker Hughes (BHI), the horizontal rig count decreased by 11 rigs in the week ended September 11, 2015, compared to the previous week’s count. This marked the third consecutive weekly horizontal rig count drop. In the 12 months ended September 11, the number of horizontal rigs in operation fell by 694, or 52%. Currently, there are 648 active horizontal rigs, 724 fewer 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 decreased by one to reach 119 last week. In the 12 months ended September 11, the number of vertical rigs fell by 253, or 68%. The number of directional rigs in operation decreased by four in the week ended September 11.

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The four-week average loss in horizontal rigs was seven for the week ended September 11. In comparison, the four-week average decrease was three for the week ended September 4. 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, 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 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 0.87% 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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