Synopsis

At long last stability? Eighteen months into the most severe downturn in the modern era means a rig count that has quit falling is actually a positive development.

Improvements in drilling efficiency suggest rig count will neither ramp quickly nor return to prior levels even with a sharp bump in commodity price, according to Hart Energy’s Heard In The Field survey.

Rig rates remain depressed with the benchmark 1,500 horsepower (hp) AC-VFD Tier I unit pricing at $14,500 on average in the spot market.

Activity clusters have evolved during the downturn as operators concentrate on the Meramec Shale and/or Stack Play.

Kingfisher County, Okla., remains the most intensively drilled location during the first half of 2016 followed by Canadian and Blaine counties, according to state filings. In contrast, operators’ top targets in the last half of 2015 were the Mississippian Lime in Alfalfa and Woods counties, Okla., and the Texas Panhandle’s Granite Wash in Hemphill and Ochiltree counties.

Newfield Exploration Co. (NYSE: NFX), Continental Resources Inc. (NSYE: CLR) and Le Norman Operating LLC have turned the most wells to completion during the first half the year, overlooking vagaries in data from the lag in state filings. Meanwhile, BP Plc (NYSE: BP), Jones Energy Ltd. (NYSE: JONE) and Midstates Petroleum Co. led during the last half of 2015.

Those firms have since dropped from the pace as the industry cuts back. In addition, several contractors are looking to add to equipment inventories but few are interested in acquiring existing drilling companies.

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

Part I. – Survey Findings

Among Survey Participants:

  • Demand For Land Drilling Rigs Stalled
    [See Question 1 on Statistical Review]
    ​Demand for land drilling rigs in the Midcontinent is significantly lower than a year ago, but has stabilized sequentially on a quarter-to-quarter basis.
    • 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 [budget] that could not stand this. I'm sitting on my hands until the oil price gets above $60 per barrel. It has to get there and hold.”

 

  • DUC Backlog Steady Quarter-To-Quarter
    [See Question 2 on Statistical Review]
    ​Although demand for drilling rigs slowed in the first half of 2016, some operators who had been waiting on an oil price recovery began completing wells anyway. However, drilling contractors say the volume of Midcontinent drilled but uncompleted wells (DUCs) in areas where they operate have not changed materially.
    • Mid-Tier Operator: “Some operators are completing 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.”

 

  • Commodity Price Still Major Catalyst For More Work
    [See Question 3 on Statistical Review]
    ​Nearly all respondents said that the catalyst to increase demand for drilling in the Midcontinent area is higher oil and gas prices. One cautioned that even as oil price rises, the ramp in drilling activity will be muted. One major operator said they have not veered from their long-term strategy as prices dropped—nor do they intend to now as prices improve.
    • Mid-Tier Operator: “The ramp in the amount of drilling rigs will not be as frenzied because of the 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 and 5 on Statistical Review]
    ​Respondents said most oil service companies want to weather the downturn rather than embrace a different business strategy. Some respondents said there are oil service companies talking to each other, but no mergers or acquisitions have come out of those discussions.
    • Mid-Tier Driller: “People have called us to buy equipment and 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. The big companies trying to merge or acquire haven’t come to fruition.”

 

  • High Horsepower Rigs In Low Teens
    [See Question 6 on Statistical Review]
    ​Day rates in the Midcontinent for a 1,500 hp AC-VFD rig averaged $10,500 to $15,000 over the last 90 days, similar to April findings. Rig rate averages provided by survey participants are itemized 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 these prices. These rates are not sustainable for contractors.”

Table I – Average Day Rates For Midcon Rigs


Size


AC Power


Diesel/SCR

Conventional Mechanical

750 hp

$9,000

1,000 hp

$12,000

$10,000

$9,000

1,500 hp

$14,500

$12,000

$10,500

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

 

  • Rig Rates Likely To Stabilize At Current Levels Quarter-To-Quarter
    [See Question 6 on Statistical Review]
    ​Contractors say rates for Midcontinent land drilling rigs are not expected to fall lower. However, respondents said there is no catalyst for rates to go higher at this time because there is a lot of equipment stacked in the area. 
    • Mid-Tier Driller: “Day rates came down and settled low. We have minimal manning [of rigs] 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 Mid-Continent. Participants included four oil and gas operators and four managers with drilling companies. Interviews were conducted in mid-June 2016.

Part II. – Statistical Review

U.S. Land Drilling

[Midcontinent]

Total Respondents = 8

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

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:

8


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

Flat:

8


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

Price is key:

7

Return on investment:

1


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

Not a lot of M&A activity:

6

Some companies should have folded, but no M&A:

2


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

Conventional Mechanical

750 hp

$9,000

1,000 hp

$12,000

$10,000

$9,000

1,500 hp

$14,500

$12,000

$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?

Flat (0%):

8

Average:

Flat


                                                                      End Statistical Survey