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US Horizontal Rig Count Crashed Hard in Week Ending October 2

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US horizontal versus vertical rigs

According to oil service company Baker Hughes (BHI), the US horizontal rig count decreased by 20 in the week ended October 2, 2015, compared to the previous week’s count. This marked the sixth consecutive weekly horizontal rig count drop. Also, last week’s drop was the highest since May.

In the 12 months ended October 2, the number of horizontal rigs in operation fell by 732, or 55%. Currently, there are 609 active horizontal rigs, 763 fewer than the record high of 1,372 on November 21, 2014. This represents a fall of 56%. Horizontal rig counts repeatedly set and broke new records throughout 2014.

The number of vertical rigs in operation decreased by six to 117 last week. In the 12 months ended October 2, the number of vertical rigs fell by 255, or 69%. The number of directional rigs in operation decreased by three in the week ended October 2.

The four-week average loss in horizontal rigs was 13 for the week ended October 2. In comparison, the four-week average decrease was 11 for the week ended September 25. So, on a smoothed basis, it looks like horizontal rigs are taking a turn for the worse.

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Horizontal rigs and the shale boom

At the end of September 2015, the horizontal rig count was still up by ~92% compared to the count in January 2007. During this period, the number of active vertical rigs fell by ~88%. 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 such as 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 the horizontal drilling operations that drove the US shale boom. ExxonMobil accounts for 17.2% of the Energy Select Sector SPDR ETF (XLE) and 23.6% of the Vanguard Energy ETF (VDE).

The shale boom has also helped midstream MLPs such as Magellan Midstream Partners (MMP), Crestwood Midstream Partners (CMLP), Buckeye Partners (BPL), and EQT Midstream Partners (EQM) to boost their revenues over the last seven years.

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