Synopsis

Rig rates may have bottomed for land drilling contractors, but there are mixed messages whether activity is rising in the Greater Rockies’ market.

On the one hand, horizontal rig count in the Denver-Julesburg (D-J) Basin rose four units during the second quarter to 17 active. However, wells turned to completion since March 1 has been relatively static in the D-J Basin at 25 per month.

Ensign Energy Services Inc. was the region’s most active driller in late July with six rigs active. This was one rig more than second ranked Helmerich & Payne Inc. (NYSE: HP).

Regionally, the D-J Basin represented 52% of active rig count while the traditional directional drilling dry gas markets in the Greater Green River and Piceance basins accounted for 32% of activity.

Of interest is the continuing exploration program in Jackson County, Colo., where Oklahoma stalwart SandRidge Energy Inc. turned two wells to completion over the last month in Colorado’s North Park Basin.

SandRidge has been active in Niobrara Shale exploration since purchasing EE3 LLC’s assets for $190 million in November 2015.

Rig rates are down roughly $1,000 dollars per day for AC-VFD units vs. January, though contractors tell Hart Energy rates appear have bottomed.

Contractors also said they don’t expect rig rates to improve in 2016. Increased efficiency in drilling and completion means operators will need fewer rigs even if activity increases.

Watch for the next Heard In The Field report on the Greater Rockies drilling market in December.

Part I. – Survey Findings

Among Survey Participants:

  • Land Drilling Rig Demand Stable, But Low
    [See Question 1 on Statistical Review]
    ​Land drilling rig demand during early third-quarter 2016 is stable, but low quarter-to-quarter and matches comments made about demand in the January report. Operators were mixed with two in a holding pattern and one conducting business as normal during this downturn.
    • Mid-Tier Driller: “Our strategy is to hold on. The other option is to jump off a cliff. We saw a lot of people go down early. It was all those operating on a shoestring that could not stand this.”
  • No Change In Drilled But Uncompleted Wells (DUCs) Backlog
    [See Question 2 on Statistical Review]
    ​While demand for drilling rigs slowed in the first half of 2016 compared with the same period last year, some operators—who had been waiting on an oil price recovery—began completing wells recently. But, overall there has not been an increase or decline in DUCs in the Other Rockies.
    • Mid-Tier Operator: “Some operators are completing the DUCs to maintain production levels. The truth is that drilling has dramatically decreased. We had 2,000 rigs operating at the peak and now we are below 400 rigs. Over the last year and a half we have seen a decrease in rig activity.”
  • Commodity Price Major Catalyst
    [See Question 3 on Statistical Review]
    ​All of the respondents agreed the catalyst to an increase in demand for drilling rigs in the region area would be higher oil and gas prices. One respondent cautioned that even as the oil price is strengthening a ramp-up would not be frenzied, but instead more muted than in the past. One major operator said they have not veered from their long-term strategy even though prices dropped and are now improving.
    • Mid-Tier Operator: “The ramp in the amount of rigs needed will not be as frenzied because of drilling efficiencies. You don't need that many rigs to gain that much footage anymore. The increase in demand will be somewhat muted.”
  • Mergers, Acquisitions Not High Priority
    [See Question 4 on Statistical Review]
    ​Respondents concurred that most companies want to weather the downturn rather than opt for a different business strategy of buying or merging with another company. Four of the eight respondents said that there are companies speaking to each other, but that no mergers have been decided. The other four said they are not hearing about companies wanting to merge or be acquired.
    • Mid-Tier Driller: “People have called us for equipment. There are companies and investment people with money who are trying to get the lowest cost items. We are seeing a lot of money trying to buy stuff, but we haven’t seen the big companies try to merge or acquire anything.”
  • High Horsepower Rigs In Low- To Mid-Teens
    [See Question 5 on Statistical Review]
    ​Day rates in the region for a 1,500 horsepower (hp) AC rig average $13,000 to $16,900, down from a range of $14,000 to $18,000 reported in January. Rig rate averages given by survey participants can be seen in Table I below.
    • Mid-Tier Driller: “Someone is always going to be drilling. If a contractor is drilling for a major they are getting great prices on drilling equipment. Contractors are not excited at the prices. These rates are not sustainable for contractors. A lot of the guys drilling have bank notes. I may wear my equipment out because I have worn it out at these rates.”

Table I – Average Day Rates For Rocky Mountain Rigs

Size

AC Power

Diesel-SCR

Mechanical

1,000 hp

$13,400

$10,000

1,500 hp

$16,900

$14,000

$13,000

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

  • Rig Rates Expected To Be Steady Quarter-To-Quarter
    [See Question 6 on Statistical Review]
    ​Day rates for land drilling rigs in the region are low for high horsepower rigs but are not expected to go any lower than they are now. However, respondents said there is no catalyst yet for rates to go higher because there is still a lot of equipment stacked in the area.
    • Mid-Tier Driller: “Day rates came down and settled low. We have minimal manning and can't afford to lose more people.”

End Survey Findings

Survey Demographics

H A R T E N E R G Y researchers completed interviews with eight industry participants in the land drilling segment in the Rocky Mountain region outside of the Bakken Shale play. Participants included three oil and gas operators and five managers with drilling companies. Interviews were conducted in early July.

Part II. – Statistical Review

U.S. Land Drilling

[Other Rockies]

Total Respondents = 8

[Operators = 3, Drilling companies = 5]

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

Remain the same:

8


2. Are the number of DUCs increasing, decreasing or remaining the same compared to three months ago?

Flat (0%):

8


3. Besides better oil and gas prices, are there any other catalysts that would help drilling improve?

Primary catalyst is oil and gas prices:

8


4. Have there been any drilling companies in your area that have merged together or acquired another drilling company?

Not seeing mergers right now:

8


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

Size

AC Power

Diesel-SCR

Mechanical

1,000 hp

$13,400

$10,000

1,500 hp

$16,900

$14,000

$13,000

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


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

Flat (0%):

8

Average:

Flat


End Statistical Survey