Drilling activity in the United States has been trending steadily upwards this year, bolstered by growing upstream capital spending by oil and gas companies and a reasonably positive outlook for oil prices . As of last week, the U.S. rotary rig count rose by around 7% year-over-year to about 1908 rigs, according to data from Baker Hughes. Much of the growth was brought about by a sharp increase in the horizontal rig count, which rose by around 23% year-over-year to touch a record high of 1,317 rigs. We believe that this trend could positively impact oilfield service companies such as Halliburton ( HAL ) and Baker Hughes ( BHI ), given that the horizontal rig count is a leading indicator of demand for unconventional well services such as hydraulic fracturing, which they specialize in.
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Increasing Fracking Demand
Unlike conventional hydrocarbon wells, which are drilled using rigs that are directed vertically, unconventional hydrocarbons lie in formations such as shales and require a more complicated and expensive technique of horizontal drilling. After these unconventional wells are drilled, they need to be stimulated using pressure pumping in order to free up the the oil and gas that is trapped inside pores of rock. This is in contrast to conventional wells, where hydrocarbons typically move to the well head naturally or with the help of a pump. While the pressure pumping markets have been steadily recovering from a two-year slump that was brought about by low gas prices and an oversupply of equipment, the rising horizontal rig count indicates that pumping demand could grow further. We believe that Halliburton stands to benefit meaningfully from this trend, since pressure pumping accounts for close to one-third of the company's revenues.
Permian Basin Leads The Transition To Horizontal Rigs
Much of the recent growth in the horizontal rig count has come from the Permian basin, which is one of the oldest and most prolific oil producing regions in the United States. Although conventionals still account for a bulk of oil production in the Permian, many wells are in their mature stages and require expensive procedures such as carbon dioxide flooding for production. Considering the high costs and potential declines in production from mature wells, operators have been steadily tapping into the basin's previously inaccessible shale oil reserves using techniques such as horizontal drilling and fracking. The shift has been occurring relatively quickly. There were a total of around 560 rigs in the Permian as of last week, 56% of which were horizontally directed. In contrast, just about 19% of the rigs in the basin were horizontally directed about 3 years ago. Moving to unconventionals could be promising for operators, since flow rates from shale wells typically start off strong, allowing companies to quickly improve returns. We expect the horizontal rig count in the Permian to continue to rise, since the basin may be extremely rich in unconventional resources. For instance, the thickness of the hydrocarbon producing zone in some parts of the Permian are estimated to be as much as five times as thick as zones in the Eagle Ford and Bakken shales.
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