Synopsis

Midcontinent drillers are slogging through the downturn, though a few are starting to look at preparations for a recovery.

Survey respondents note that several customers have created a backlog of projects to tackle as soon as oil patch economics become viable.

For oil, economics begin improving for operators at $51, though a few suggest the pricing threshold needs to be as high as $70 for some projects to restart. Otherwise, demand for rigs in the Midcontinent has been flat at very low levels.

Rig count is beginning to erode in the Stack, Scoop, Cana-Woodford area, which had been the last U.S. market to maintain drilling levels in the current downturn. There remains substantial interest in the play as operators continue delineating the growing aerial extent of the Mississippian-aged Stack.

Rig pricing reflects soft demand with average day rates for the benchmark 1,500 horsepower (hp) AC-VFD tier I rig now averaging $14,000 per day—among the lowest in the country.

Contractors are also bundling add-ons into the day rate. During periods of high demand, contractors break out items, like top drives, walking packages, etc., for pricing over and above the day rate.

As a result, the swing in pricing from cyclical highs to lows is more exaggerated than the difference in stated rig rates would suggest. In other words, contractors are facing a mean market out there.

Watch for the next Heard In The Field report on the Midcontinent drilling market in June 2016.

Part I. – Survey Findings

Among Survey Participants:

  • Only Necessary Work In Second-Quarter 2016
    [See Question 1 on Statistical Review]
    ​Demand for drilling rigs in the Midcontinent area has remained steady, but low quarter-to-quarter and there remains an excessive number of rigs that are stacked. Some contractors are focusing on this down time to get ready for the turnaround, but most operators are waiting for oil prices to increase, and a few are continuing to operate at a reduced capacity.
    • Top-Tier Operator: “We are queuing up projects and once the economics are viable again, we will be ready to move on them.”
  • Oil Prices Need To Be $50 Or Above
    [See Question 2 on Statistical Review]
    ​Respondents said that recovery is tied to oil prices, but is not solely hinged on them. One top tier operator said cash flow was equally important, another top tier operator said that some companies could make a profit at $20 per barrel while other companies might need $70 per barrel oil. On average respondents said that oil should be $51 per barrel to see demand pick up again.
    • Mid-Tier Driller: “Some companies need $70 per barrel because they based all their economics on that price. If you talk about a healthy company that is not over borrowed their number might be $20 per barrel. A company can drill with higher efficiencies as well as lower costs. All vendors are dropping prices by 60% to 65%, especially frackers.
  • Right Under $3 Gas Prices Desired
    [See Question 3 on Statistical Review]
    ​Three of the seven respondents said that gas prices were not important to their business operation. However, four said that average gas prices would need to be $2.90 to push drilling demand up.
    • Small, Independent Operator: “Demand would pick up with gas at $2 index price. We would start some project at $2.50 to $3. Those prices would kick-start some projects.”
  • High HP Rigs All Inclusive
    [See Question 4 on Statistical Review]
    ​Rig rates are in the low double digits, with contractors adding everything that used to be extra in to keep rate integrity. Day rates in the Midcontinent for a 1,500 hp A/C rig average $12,000 to $15,000. Rig rate averages given by survey participants can be seen in table I below.
    • Mid-Tier Driller: “We have our 1,500 hp AC rigs and more advanced rigs working, but we are not going to tear our equipment up for no money. We’ve already lost a lot of people and everyone is at bottom-rate thresholds.”

Table I – Average Day Rates For Midcontinent Rigs

Size

AC Power

Diesel/SCR

Mechanical

750 hp

—

$9,000

$8,000

1,000 hp

$12,000

$11,000

$10,000

1,500 hp

$14,000

$12,000

—

[Rates shown are an average ‘per day’ rate among all respondents in the category.]

  • Rig Rates Seemingly At Bottom, Likely Not To Fall Quarter-To-Quarter
    [See Question 5 on Statistical Review]
    ​All seven respondents said that rig rates could not go lower in the next three months. One said that rig rates are at their bottom now.
    • Top-Tier Driller: “Tier one rigs like a 1,500 hp walkers today are at a bottom of $15,000-ish and I don't know where it will be in three months. But, I don't see it going to $12,000 to $13,000.”
  • Some Companies Have Left Midcontinent
    [See Question 6 on Statistical Review]
    None of the respondents identified any specific drilling company that has left the area, though several respondents said some drilling contractors had pulled out of the Midcontinent.
  • Most Operators Not Delaying Payments
    [See Question 7 on Statistical Review]
    ​Five of the respondents said that while they have heard of some operators delaying payments for longer than usual, none had direct experience with this practice. Only one of the seven respondents said that operators were delaying payments beyond the typical 30 to 60 days.
    • Mid-Tier Operator: “We pay before 30 days and always have. I know this goes on and some companies have done it as a practice even in the good times, and maybe more are doing it now, but 30 days has been a practice in the oil patch forever.”

End Survey Findings

Survey Demographics

H A R T E N E R G Y researchers completed interviews with seven industry participants in the land drilling segment in the Midcontinent region. Participants included four oil and gas operators and three managers with drilling companies. Interviews were conducted in April 2016.

Part II. – Statistical Review

U.S. Land Drilling

[Midcontinent]

Total Respondents = 7

[Oil and gas operators = 4, Drilling companies = 3]

1. Do you expect demand for drilling rigs to grow, remain the same, or shrink in second-quarter 2016 compared to the first quarter?

Remain the same:

7


2. What would oil prices have to be for demand for drilling rigs to improve?

$50:

3

$55:

1

Cash flow more important than price for us:

1

Don’t know, so speculative:

2

Average:

$51


3. What would gas prices have to be for demand for drilling rigs to improve?

$2:

1

$2.75:

1

$3.50:

2

Gas prices not important to us:

3

Average:

$2.90


4. What are the average rig rates in your area? Is this rate for an AC power, diesel electric-SCR, or conventional mechanical rig?

Size

AC Power

Diesel/SCR

Mechanical

750 hp

—

$9,000

$8,000

1,000 hp

$12,000

$11,000

$10,000

1,500 hp

$14,000

$12,000

—

[Rates shown are an average ‘per day’ rate among all respondents in the category.]


5. Do you expect rig day rates to increase, remain the same or decrease over the next three months? By what percentage?

Flat (0%):

7

Average:

Flat


6. Are there any drillers that have left your area?

None that I know of:

3

Plenty have left, don’t have names:

2

There is a lot of instability:

1

Some should have left but they haven’t yet:

1


7. Are operators delaying paying their invoices? If so, are companies taking special steps to collect receivables?

This is going on, but no direct experience:

4

Not that I have heard:

1

We pay 30 days and always have:

1

Heard there is plenty of this, but don’t know terms:

1


End Statistical Survey