US horizontal versus vertical rigs
According to Baker Hughes (BHI), the US horizontal rig count rose by two in the week ended November 13, 2015, compared to the count in the week ended on November 6. This marked the second consecutive rise in the US horizontal rig count. The horizontal rig count is still close to its lowest since January 2010.
In the 12 months ended November 13, the number of horizontal rigs in operation fell by 782, or 57%. Currently, there are 587 active horizontal rigs, or 785 fewer than the high of 1,372 that was recorded on November 21, 2014. This represents a fall of 57%. Notably, horizontal rig counts repeatedly broke new records throughout 2014.
The number of vertical rigs in operation rose by three to 108 last week. In the 12 months ended November 13, the number of vertical rigs fell by 246, or 70%. The number of directional rigs in operation fell by nine in the week ended November 13.
The four-week average loss in horizontal rigs was one for the week ended November 13. In comparison, the four-week average fall was three for the week ended November 6. Four-week averages give a broader view of rig counts. On a four-week basis, it looks like the fall in US horizontal 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 (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.
The 57% fall 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. ExxonMobil accounts for 16.7% of the Energy Select Sector SPDR ETF (XLE) and 22.8% of the Vanguard Energy ETF (VDE).
The shale boom has helped midstream MLPs such as Magellan Midstream (MMP), Crestwood Equity (CEQP), Buckeye Partners (BPL), and EQT Midstream (EQM). These midstream MLPs have benefited from the shale boom.
In the next part of this series, we’ll look at the US onshore rig count as of November 13, 2015.