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Assessing the Sharp Fall in US Horizontal Rigs as of October 30

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US horizontal versus vertical rigs

According to oil service company Baker Hughes (BHI), the US horizontal rig count decreased by 14 in the week ending October 30, 2015, compared to the count in the week ending on October 23. This marked the highest US horizontal rig count drop in the past four weeks. The horizontal rig count is now at its lowest since December 2009.

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Further rig details

In the 12 months ending October 30, the number of horizontal rigs in operation fell by 776, or 57%. Currently, there are 577 active horizontal rigs, or 795 fewer than the high of 1,372, recorded on November 21, 2014. This represents a fall of 58%. Notably, horizontal rig counts repeatedly broke new records throughout 2014.

On the other hand, the number of vertical rigs in operation increased by three to 112 last week. In the 12 months ending October 30, the number of vertical rigs fell by 253, or 69%. The number of directional rigs in operation fell by one in the week ending October 30.

The four-week average loss in horizontal rigs was eight for the week ending October 30. In comparison, the four-week average fall was ten for the week ending October 23. Four-week averages give a broader view of rig counts. On a four-week basis, it looks like the drop in US rigs is decelerating.

Horizontal rigs and the shale boom

At the end of October 2015, the horizontal rig count was still up by ~72% compared to the count in January 2007. During this period, the number of active vertical rigs fell by ~89%. 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 Corporation (WLL), Exxon Mobil Corporation (XOM), Royal Dutch Shell (RDS.A), Marathon Oil Corporation (MRO), Pioneer Natural Resources (PXD), and Continental Resources (CLR) operate in unconventional resource shales. They use horizontal drilling extensively.

The 57% drop in the number of active horizontal rigs in the past 12 months shows that these companies may be reducing the horizontal drilling operations that drove the US shale boom. Exxon Mobil accounts for 17.3% of the Energy Select Sector SPDR ETF (XLE) and 24.0% of the Vanguard Energy ETF (VDE).

The shale boom has 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 significantly over the last seven years.

In the next part of this series, we’ll look at the US onshore rig count as of October 30, 2015.

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