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US Rig Count Returning to a Downtrend: What’s the Impact?

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Total US rig count

According to oilfield service company Baker Hughes (BHI), there were 848 active oil and gas rigs in the United States in the week ended September 11, 2015. This is 16 less than the previous week, which ended September 4. In the past three weeks, 37 US rigs were idled. Until the week ended June 19, 2015, the US rig count had fallen consecutively for 28 weeks. With last week’s fall, the US rig count is now nine less than the June 19 level.

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The four-week average loss in US rig counts was nine for the week ended September 11. In comparison, the four-week average decrease was five for the week ended September 4. Four-week averages offer a smoother view of this trend, which is otherwise quite volatile on a weekly basis. So, even on a smoothed basis, it looks like the US rigs have taken a turn for the worse.

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 ended June 19.

August’s average rig count of 883 represents a rise of 17 from the 866 active rigs in July. In comparison, July’s rig count increased by five from June. The monthly drop in rigs in 2015 reversed in July and rose again in August.

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, reaching 1,931. Since then, ~56% of the rigs have been idled.

Impact on energy companies

Energy companies like Encana Corporation (ECA), WPX Energy (WPX), SM Energy (SM), Concho Resources (CXO), and RSP Permian (RSPP) have upstream operations. A falling rig count typically indicates decreasing exploration and development activities by these upstream companies. This could lead to lower energy production.

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

However, lower production could push energy prices higher, which could eventually pull rig counts higher. We’ll study this relationship in more detail later in this series.

SM Energy accounts for 1.36% of the SPDR S&P Oil & Gas Exploration & Production ETF (XOP). WPX Energy accounts for 0.14% of the Vanguard Energy ETF (VDE).

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