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US Rigs Are the Lowest since January 2003: What’s the Impact?

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Total US rig count

According to oilfield service company Baker Hughes (BHI), there were 842 active oil and gas rigs in the US in the week ending September 18, 2015. This is six less than the previous week ending September 11. In the past four weeks, 43 US rigs were idled. With last week’s fall, the US rig count is now at its lowest level since January 2003.

The four-week average loss in the US rig count was 11 for the week ending September 18. In comparison, the four-week average fall was nine for the week ending September 11. The four-week averages offer a smoother view of this trend, which is otherwise quite volatile on a weekly basis. So, on a smoothed basis, it looks like the fall in the US rig counts is accelerating.

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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 ending 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 rose by five from June. The monthly fall in rigs in 2015 reversed in July. The rig counts rose again in August.

The overall US rig counts 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. It reached 1,931. Since then, ~56% of the rigs have been idled.

Impact on energy companies

Energy companies like Encana (ECA), WPX Energy (WPX), SM Energy (SM), Concho Resources (CXO), and RSP Permian (RSPP) have upstream operations. A falling rig count typically indicates falling 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. Eventually, this could pull rig counts higher. We’ll study this relationship in more detail later in this series.

SM Energy accounts for 1.49% 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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