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Steepest US Rig Count Fall in 5 Months: What’s the Impact?

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US rig count

According to oilfield service company Baker Hughes (BHI), there were 809 active oil and gas rigs in the United States in the week ended October 2, 2015. This is 29 less than the previous week, which ended September 25.

In the past five weeks, 68, or 8%, US rigs were idled. Last week’s drop was the highest since April 24. With last week’s fall, the US rig count is now at its lowest since February 2003.

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The four-week average loss in US rig counts was 14 for the week ended October 2. In comparison, the four-week average decrease was ten for the week ended September 25. Four-week averages offer a smoother view of this trend, which is otherwise quite volatile on a weekly basis. On a smoothed basis, it looks like the drop in US rigs is accelerating.

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, 2015.

September’s average rig count of 848 represents a fall of 35 from the 883 active rigs in July. In contrast, August’s rig count increased by 17 from July. The monthly drop in rigs in 2015 reversed for the first time in July. September’s rig fall takes the rig count once again into a downtrend, set earlier in the year.

The overall US 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, ~58% of the rigs have been idled.

Impact on energy companies

Energy companies such as Encana (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 such as 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 1.47% of the SPDR S&P Oil & Gas Exploration & Production ETF (XOP). WPX Energy accounts for 0.12% of the Vanguard Energy ETF (VDE).

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