What Does Last Week’s US Rig Count Fall Indicate?
Falling Natural Gas Rigs Push US Rig Count Lower Last Week
Total US rig count
According to oilfield service company Baker Hughes (BHI), there were 874 active oil and gas rigs in the United States in the week ended July 31, 2015. This is two fewer rigs than in the previous week, which ended July 24. Last week, the US rig count weakened after it had recorded the highest rig count rise in a year for the week ended July 24. Until the week ended June 19, the US rig count had fallen consecutively for 28 weeks.
Including the rise in the previous week, the four-week average change in the US rig count increased to three. In comparison, the four-week average change increased to four for the week ended July 24. Four-week averages offer a smoother view of this trend, which is otherwise quite volatile on a weekly basis.
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. With last week’s fall, the US rig count is still at its lowest level since January 2003.
July’s average rig count of 868 represents a rise of seven from the 861 active rigs in June. In comparison, June’s rig count fell by 28 from May. Thus the monthly rate of rig count change in 2015, which was continually decreasing until June, has reversed in July.
The overall US rig count hit 2,031 in September 2008, the highest it had been since July 1987, according to Baker Hughes. In September 2014, the average rig count came close to that record. It reached 1,931. Since then, ~55% of the rigs have been idled.
Impact on energy companies
Energy companies including Encana (ECA), Linn Energy (LINE), SM Energy (SM), Carrizo Oil & Gas (CRZO), and Newfield Exploration (NFX) have upstream operations. A falling rig count typically indicates decreased exploration and development activities among 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 lose from decreased drilling.
However, lower production could push energy prices higher, which could eventually prompt rig counts to rise. We’ll study this relationship in more detail later in this series. SM Energy accounts for 1.5% of the SPDR S&P Oil & Gas Exploration & Production ETF (XOP). Carrizo Oil & Gas accounts for 0.13% of the iShares U.S. Energy ETF (IYE).
Browse this series on Market Realist:
