Synopsis

Permian Basin drilling levels fell in the first half of 2016 as commodity prices improved and operators began tackling drilled but uncompleted wells (DUCs). The trend further dampened demand for rigs and kept pricing depressed.

State filings indicate the number of wells drilled fell 14% sequentially in the Permian in first-quarter 2016 vs. fourth-quarter 2015.

Specifically, wells drilled in the Delaware Basin fell to 70 in the first quarter from an average 81 per month in the fourth quarter. The number continued to decrease in the first two months of the second quarter to 50 wells drilled.

Similarly, Midland Basin wells drilled fell to 121 in the first quarter from 137 monthly on average in the fourth quarter. Wells drilled in the Midland Basin eventually fell to 92 for the first two months of the second quarter.

By formation, operators decreased the number of wells targeting the Bone Spring in the Delaware Basin and the Spraberry in the Midland Basin. However, the number of wells targeting the Wolfcamp Shale increased in both basins.

Overall, Wolfcamp drilling rose to 76 wells in first-quarter 2016 from an average 66 wells monthly in fourth-quarter 2015. The number of Wolfcamp wells dropped during the first two months of the second quarter though.

Spraberry wells fell to 73 in the first quarter from 89 monthly in the fourth quarter before dropping to 60 for the first two months of the second quarter.

Despite the trend, the Spraberry remains the most commonly drilled target in the Permian Basin.

About 35% of wells drilled have targeted the Spraberry from Oct. 1, 2015 through May. The Wolfcamp is close behind with 31% of wells.

Operators need higher commodity pricing before demand for drilling services improves, according to Hart Energy’s Heard In The Field survey.

Leading edge rig rates reflect this trend and now range from $12,500 to $14,000 per day for the benchmark 1,500 horsepower (hp) AC-VFD Tier I rig. A few rigs are still on long-term contracts for newbuild units that were signed before the downturn in commodity prices began.

Watch for the next Heard In The Field report on the Permian Basin drilling market in September.

Part I. – Survey Findings

Among Survey Participants:

  • Permian Basin Drilling In Holding Pattern
    [See Question 1 on Statistical Review]
    Demand has stabilized in the last three months, but is still slower than the pace of drilling six months ago. Respondents remarked that companies were well positioned to weather 2015 with hedges and capital, but 2016 has seen a slowdown in drilling as those buffers expire.

 

  • Uncompleted Wells Holding
    [See Question 2 on Statistical Review]
    While drilling has slowed in the Permian Basin, some operators are working through a backlog of DUCs. While a few individual companies have seen a decrease in their DUCs, overall the number is steady.
    • Mid-Tier Operator: “We are not postponing completions right now. It is easier to get frack crews than it was a year ago.”

 

  • Higher Oil, Gas Prices Would Spark Demand
    [See Question 3 on Statistical Review]
    ​Five of eight respondents identified commodity price as the most important factor for whether drilling will increase in the Permian Basin. One respondent said access to capital or cash flow, like the majors have, was a potential trigger. Another respondent said that the election could prompt some activity while another is waiting for service costs to drop further.
    • Top-Tier Operator: “Price is everything, but everyone needs to readjust to these prices because they were ridiculously high before.”

 

  • Less Mergers, Acquisitions Than Expected
    [See Question 4 on Statistical Review]
    ​Respondents said there are contractors speaking to each other about merging or acquiring but no deals have happened yet. One respondent said that there is “a lot of money chasing deals” among operators in the Permian Basin but few have come to fruition. Three said assets are still too highly priced, and two said they had not heard of any mergers at all. 
    • Mid-Tier Operator: “It’s very strange because there haven’t been that many deals done. There are a lot of companies, predominately private-equity backed, that are non-performing with their previous assets and there is a lot of money chasing a lot of deals. There is still a lot of capital out in the Permian. I guess it depends on debt structure with the bankruptcies and creditors getting 10 to 15 cents on the dollar.”

 

  • Low to Mid-Teens For Big Rigs
    [See Question 5 on Statistical Review]
    ​Leading edge rig rates in the Permian Basin for the benchmark 1,500 hp AC-VFD Tier I rig ranged from $12,000 to $14,000, similar to findings in March. Rig rate averages given by survey participants can be seen in Table I below.
    • Top-Tier Operator: “We are under contract with a newbuild with a high day rate of $28,000 for another 18 months. They have offered no concessions because they put out a lot of money to have it built. It is hard for most of the contractors to do that. If I went to the open market, the same rig would go for $14,000 and I actually even heard of $12,500.”

Table I – Average Day Rates For Permian Rigs

Size

AC Power

Diesel/SCR

Mechanical

750 hp

$9,000

1,000 hp

$12,000

$10,000

$9,000

1,200 hp

$13,000

1,500 hp

$14,000

$13,500

$11,000

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

 

  • Low Day Rates Holding Quarter-To-Quarter
    [See Question 6 on Statistical Review]
    ​Rig rates for Permian land drilling units are in the low teens vs. averages in the mid-$20,000 a little over a year ago. Drilling slowed in the first half of 2016, and operators are focusing on completing the DUC inventory. This trend keeps rig rates depressed in the Permian and no increases are expected during the next three months, which mirrors findings in March.
    • Top-Tier Driller: “Because drilling has slowed down people are working through their DUCs now, but there are also not a lot of wells drilled so the number of completions is pretty steady.”

                                                                            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 Permian Basin. Participants included three oil and gas operators and five managers with drilling companies. Interviews were conducted in May 2016.

Part II. – Statistical Review

U.S. Land Drilling

[Permian Basin]

Total Respondents = 8

[Oil and gas operators = 3, Drilling companies = 5]

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 everything:

5

The election:

1

Cash/capital:

1

Costs to come down:

1


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

Many companies are talking to each other but not yet:

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

750 hp

$9,000

1,000 hp

$12,000

$10,000

$9,000

1,200 hp

$13,000

1,500 hp

$14,000

$13,500

$11,000

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