Synopsis

The most accurate metaphor for Marcellus and Utica drilling services in the Appalachian Basin is the yo-yo, according to Hart Energy’s Heard In The Field survey.

Similar to the trajectory of that childhood toy, demand for drilling services rises when commodity prices improve and falls when they retreat. While natural gas markets exhibit their own dynamics, the price of oil still matters—especially in liquids-rich gas plays such as southwest Pennsylvania.

The June recovery in oil prices created additional inquiries on the availability of drilling rigs through the month of July. When oil fell in early August, inquiries for drilling rigs softened.

The threshold between supply and demand seems to be in the neighborhood of $45 oil, with demand rising as oil exceeds that number and retracting whenever oil falls below.

Operators appear to be working through the inventory of drilled but uncompleted wells (DUCs) at slow rates. This is mostly to maintain equilibrium in their water recycling programs, according to one survey participant.

Pricing remains flat with the average rate for the benchmark 1,500 horsepower (HP) AC-VFD unit at $16,000 per day. That price includes rigs still on legacy-term contracts of $25,000.

EQT Corp. (NYSE: EQT), Rice Energy Inc. (NYSE: RICE), Range Resources Corp. (NYSE: RRC) and Seneca Resources Corp. remain the most active operators, with a majority of drilling activity occurring in southwest Pennsylvania.

Watch for the next Heard In The Field report on the Marcellus Shale drilling market.

Part I. – Survey Findings

Among Survey Participants:

  • Demand Improved Slightly Early Third Quarter; Lackluster Now
    [See Question 1 on Statistical Review]
    ​Five of the eight respondents said drilling demand has inched up during early July, but then fell back to stagnant levels when the commodity price fell again recently. Three respondents said there had been more interest in hiring rigs, but the interest dissolved when prices slipped.
    • Top-Tier Driller: “When oil shot above $45 a barrel we saw a pick-up in inquiries, but it didn’t last.”

 

  • DUC Backlog Unchanged
    [See Question 2 on Statistical Review]
    ​All respondents said the number of DUCs being completed was flat quarter-to-quarter. Respondents had been hopeful that operators would start working through backlogs leftover from last year when commodity prices had stabilized in the high $40s, but now uncertainty over oil prices have left many unsettled again.
    • Mid-Tier Operator: “I still think most folks in the Marcellus are just completing wells to maintain water inventory because if they shut down water impoundments continue to pile up. So they are getting their recycled water inventories in check.”

 

  • Commodity Price Major Catalyst
    [See Question 3 on Statistical Review]
    ​Seven respondents said that price is the only determining factor in rig demand, but one respondent said low rig rates could play a part.
    • Mid-Tier Driller: “Everyone is focused on the price of oil, but we are looking at the price of natural gas. There has been some improvement.”

 

  • Less M&A Activity Than Expected
    [See Question 4 on Statistical Review]
    ​Six respondents have not heard of any drilling companies merging or acquiring others in the Marcellus area. Two respondents, however, said there had been some debt restructuring among companies in the area. One respondent said that if a company couldn’t get their price in an M&A deal, then restructuring was the path they took.
    • Top-Tier Driller: “We have seen a surprising number of operators and service sides restructuring, but we have not seen as many M&As as you would think.”

 

  • High Horsepower Rig Rates Stable
    [See Question 6 on Statistical Review]
    ​Day rates in the Marcellus for a 1,500 hp AC-VFD rig average between $10,500 to $25,500 depending on whether the rig is in the spot market or on earlier multiyear term contracts, which represents a range of independents and major driller rates. Rig rate averages given by survey participants can be seen in Table I below.
    • Top-Tier Driller: “Everyone has been pretty fair and there is not an expectation that we will lock-in at these low rates. Most guys are willing to look at a six-month term and keep a rig working and keep it hot with the hopes it turns around. We are 500 rigs away from any change in rates.”

Table I – Average Day Rates For Marcellus Rigs

Size

AC Power

Diesel/SCR

Conventional Mechanical

1,000 hp

$13,000

$12,000

$10,000

1,500 hp

$16,000

$14,000

$10,500

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

 

  • No Movement In Rates Coming
    [See Question 7 on Statistical Review]
    All eight respondents said that they are not expecting day rates for land drilling rigs to change until the inventory of stacked rigs has shrunk.

                                                                            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 Marcellus. Participants included two oil and gas operators and six managers with drilling companies. Interviews were conducted in July 2016.

Part II. – Statistical Review

U.S. Land Drilling

[Marcellus/Utica]

Total Respondents = 8

[Operators = 2, Drilling companies = 6]

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

Grow:

5

Remain the same:

3


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:

7

Rig rates, as long as contract rates stay low:

1


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

Not that I am hearing:

6

More restructuring than M&A activity:

2

There was a lot of speculation it would pick up:

1

Some could not get their price, so restructured:

1


5. What are 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

Conventional Mechanical

1,000 hp

$13,000

$12,000

$10,000

1,500 hp

$16,000

$14,000

$10,500

[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? By what percent?

Flat (0%):

8

Average:

Flat


                                                                            End Statistical Survey