Synopsis

When recovery begins in oil and gas, it will begin first in the Permian Basin.

That’s the thinking among contract drillers.

The contract drilling sector continues to shave costs out of the equation so a sustained increase in oil prices may jump start activity at levels lower than previously understood.

Contractors say the industry will reach that threshold if oil prices are sustained above $48 dollars per barrel. That’s the theory, anyway.

Most other markets see contractors projecting a need for pricing anywhere from $5 to $10 higher than what is reported in the Permian.

Operators, meanwhile, continue to look at low cost vertical wells, though the percentage is small in comparison to overall activity. Cost reductions are evident in rig rates, which now average under $15,000 per day for the benchmark Tier I 1,500 horsepower (hp) AC-VFD rig.

Rates might be lower yet were it not for a handful of rigs still working on long-term contracts. Rates were down 9% over the last 90 days though much of the decline reflects the expiration of legacy term contracts at higher pricing.

Leading edge rates have been reported as low as $12,000 per day while all leading edge rates are now below $15,000. Little surprise, since activity levels are 25% of what they were a year ago, according to survey respondents.

Once again, drilling contractors insist rates cannot go any lower, though rates in fact seem to deflate on every 90-day survey.

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

Part I. – Survey Findings

Among Survey Participants:

  • Very Weak Demand
    [See Question 1 on Statistical Review]
    ​Seven of the eight respondents said that demand was steady first-quarter 2016 compared with the fourth quarter of 2015, but way down from a year ago. One respondent said demand had shrunk even more during the last three months. One respondent explained that the Permian would be the first place where a turnaround would take effect, so everyone has cut costs and is waiting for oil prices to go up to begin work.
    • Mid-Tier Operator: “We've slowed way down, but we will honor our drilling obligations. We are doing horizontals with better prices on rigs and drilling. We have no debt so we are strong. We are actually looking at a shallow exploratory well that has come our way and it's low cost.”
  • Oil Price Needs To Average ~$48 For Drilling To Improve
    [See Question 2 on Statistical Review]
    ​Respondents had differing views on what oil prices needed to be for demand to pick up with responses ranging from $35 to $55 for an average of about $48. Others did not give an oil price range, but said that each situation company to company is dependent on costs and cash flow.
    • Top-Tier Operator: “It’s a different world than 16 months ago. I’ve been in this business for 36 years and most of my career in the Permian Basin and I’ve been through several up and down cycles, but what hurts is that this downturn came on really fast when we were going 100 miles an hour. We had such difficulty bringing people into the Permian to work and were paying salaries that were too high for experience levels. When it’s good, it’s really good but when it’s bad—it is bad.”
  • Natural Gas Price Needs To Reach $3 For More Activity
    [See Question 3 on Statistical Review]
    ​For most respondents the Permian is an oil play, although some have an interest in gas. Three respondents said they were active in the gas markets and gave a range of $2.25 on the low end to $3.75 on the high end as a price range that would be conducive to drilling more gas wells.
    • Mid-Tier Operator: “Gas at $3.50 to $4 would be ideal. We have wells we are going to go back and look at the gas contracts because we just had some wells get only $1 and I don't see how that is possible. It wasn't that low when we got them.”
  • Day Rates Slip Again
    [See Question 4 on Statistical Review]
    ​Day rates in the Permian Basin for the benchmark 1500 hp AC-VFD Tier I rig range $12,000 to $15,000 for an average of $14,500 per day, down from an average $16,000 in December. Rig rate averages given by survey participants can be seen in Table I below.
    • Major Operator: “In the Permian, infrastructure is built out, so we are waiting for a pick-up in oil prices. We are queueing up projects so we can pull the trigger. The Permian will most likely be the number one spot.”

Table I – Average Day Rates For Permian Rigs

Size

AC Power

Diesel/SCR

Mechanical

1000 hp

$12,000

$11,000

$10,000

1500 hp

$14,500

$13,000

$11,000

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

  • Rig Rates Continue Under Pressure
    [See Question 5 on Statistical Review]
    ​Excessive inventory, low demand, and uncertainty continue to put pressure on rig rates in the Permian Basin and rates are expected to be flat during the next three months. Respondents continue to say that rates cannot go lower, but each quarter rates continue to tick downward.
    • Large, Independent Operator: “This year will be about asset sales and paying down debt. There are some areas where we are drilling in which we have no discretionary wells to hold acreage.”
  • Activity Is Stunted In The Permian
    [See Question 6 on Statistical Review]
    ​All respondents said that drilling activity is at a bare minimum. Oil companies and drilling contractors alike have endured layoffs, cost cutting, and are planning for 2016 to be a batten-down-the-hatches year.
    • Major Operator: “Compared to the peak, it is fair to say we are operating at 25% of what we had been. For the foreseeable future, we will maintain three drilling rigs and six workover rigs.”
  • No Drillers Known To Be Leaving Area
    [See Question 7 on Statistical Review]
    ​Seven respondents said they do not know of any driller leaving the area. Several believe the Permian Basin will be one of the first areas to see demand improve when oil prices recover.
    • Mid-Tier Operator: “I have not heard of anyone going bankrupt or leaving.”
  • No Mention Of Drillers Going Out Of Business
    [See Question 8 on Statistical Review]
    Five of the eight respondents said that they did not know of drilling company that had gone out of business, but they all qualified that answer with “yet.” One respondent said some small drillers might be debt-heavy and others may have shut down operations until demand improves.

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 seven oil and gas operators and one manager with a drilling company. Interviews were conducted in early to mid-March 2016.

Part II. – Statistical Review

U.S. Land Drilling

[Permian Basin]

Total Respondents = 8

[Oil and gas operators = 7, Drilling companies = 1]

1. Do you expect demand for drilling rigs to grow, remain the same, or shrink in first-quarter 2016 compared to the fourth quarter of 2015?

Remain the same:

7

Shrink:

1


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

$35:

1

$45:

1

$50:

1

$55:

2

Depends on cash flow and company:

3

Average:

$48


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

$2.25:

1

$3:

1

$3.75:

1

Some markets work at today’s price:

2

Gas price goes hand-in-hand with oil price:

2

Don’t know:

1

Average:

$3


4. 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

1000 hp

$12,000

$11,000

$10,000

1500 hp

$14,500

$13,000

$11,000

[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?

Flat (0%):

8

Average:

Flat


6. Which drilling companies are the most active in your area during the downturn?

Very little drilling:

6

Drilling to keep acreage only:

1

Pioneer still has work:

1


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

None mentioned:

7

Some start-up operations that have left:

1


8. Are there any drillers that have gone out of business in your area?

Not yet:

5

Small drillers in debt:

1

Some small drillers have shut down, but more coming:

1


End Statistical Survey