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US Rig Count Down 8 Weeks in a Row: What’s the Impact?

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US rig count

According to oilfield service company Baker Hughes (BHI), there were 787 active oil and gas rigs in the United States in the week ending October 16, 2015. This was eight fewer than in the previous week.

In the past eight weeks, 11% of US rigs, or 98 rigs, were idled. With last week’s fall, the US rig count is now at its lowest since May 2002.

The four-week average decrease in US rig counts was 14 for the week ending October 16. In comparison, the four-week average decrease was 13 for the previous week. Four-week averages offer a broader view of rig counts, which are otherwise quite volatile on a weekly basis. On a four-week basis, it looks like the drop in US rigs 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, 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. However, September’s rig fall took the rig count once again into the downtrend trend set earlier in the year.

In September 2008, the overall US rig count hit 2,031—the highest level since July 1987, according to Baker Hughes. In September 2014, the average rig count came close to that record, reaching 1,931. Since then, ~59% 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 increase rig counts. We’ll study this relationship in more detail later in this series.

SM Energy accounts for 1.6% of the SPDR S&P Oil & Gas Exploration & Production ETF (XOP). WPX Energy accounts for 0.1% of the Vanguard Energy ETF (VDE).

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