Synopsis

The Appalachian Basin is witnessing a deteriorating drilling market with few expectations of recovery before 2017.

Rig count continues to decline in the Marcellus region, the supply of drilling rigs remains excessive, and contractors peg utilization in the low 40-percentile range.

Rates are down across the board for all rig classes.

Rig rates continue to fall with the range of rates for the benchmark 1,500 HP AC-VFD rig listed as $15,000 to $20,000 with the former representing the spot market and the latter representing rigs that are still on long-term contracts.

In a recurring refrain that surfaces every quarter, drilling contractors say rates cannot go any lower though in fact rates continue to inch down. However, the lack of demand for drilling services indicates that operators are not interested in drilling rigs at any price in the current low commodity price environment.

For the small volume of work available, contractors are reporting shorter-term contracts that are either multi-well or multi-month.

Watch for the next Appalachian drilling report in January 2016.

Part I. – Survey Findings

Among Survey Participants:

  • Rig Demand Falls Further
    [See Question 1 on Statistical Review]
    ​In the last three months demand for land drilling rigs in the Marcellus has weakened, a deterioration from the August report when demand was steady, according to seven of the nine respondents. Most of the respondents believe demand would remain weak through the end of the year. Four of the nine respondents said that demand was not expected to pick up until 2017.
    • Mid-Tier Operator: “It has gotten worse. As the prices continue to be low, different companies have made announcements of dropping rigs and not drilling in 2016. It’s one thing to say I can hang on for six months, but the six-month turnaround in oil prices didn't happen in '14, didn't happen in '15, and doesn't look like it will happen in 2016.”
  • Excessive Rig Inventory
    [See Question 2 on Statistical Review]
    ​All respondents said that the rig inventory in the Marcellus was excessive, and that there would be an oversupply for the near future.
    • Top-Tier Driller: “The rig count is going down all the time. I know that utilization is low even though all of our rigs are out and running.”
  • Utilization Drops To 43%
    [See Question 3 on Statistical Review]
    ​Respondents said that rig utilization is at 43% in the Marcellus, down from approximately 50% in the August report. Most agreed that utilization would not increase before the end of 2015 and possibly could take another two years before it cycled back up significantly.
    • Top-Tier Operator: “Utilization is down to about 61 rigs, there may be a few more because of top-hole rigs not being counted. I'd have to say utilization is at 45% tops.”
  • Rig Day Rates At Recent Lows
    [See Question 4 on Statistical Review]
    ​The day rates in the Marcellus area for a 1500 HP A/C rig ranged between $15,000 to $20,000.The top of this range represents rigs that have been under contract. Rig rate averages given by survey participants can be seen in Table I below.
    • Mid-Tier Driller: “Our day rates were $11k to $14k and now they are down to $10k to $11k and we can't even get them picked up for that amount.”

Table I – Average Day Rates In Marcellus Area

Size

AC Power

Diesel/SCR

Mechanical

600 HP

$10,500

750 HP

$14,000

1000 HP

$18,000

$15,000

$10,000

1200 HP

$15,000

1500 HP

$18,000

$17,500

$16,000

2000 HP

$20,000

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

  • Rig Rates Weak
    [See Question 5 on Statistical Review]
    ​All respondents said that rig rates were as low as they could possibly go and that it is not a question of how low rates can go because operators are simply not drilling wells. No respondent expected rates to drop lower, although all respondents had predicted they would not go lower in the last Marcellus report and they did drop.
    • Top-Tier Operator: “If you sign a longer contract then the day rate will drop somewhat. Rig rates have come down with each renewal and the bigger drops come from those who are willing to sign-up for more than 30 days.”
  • Cancellations Are Few And Far Between
    [See Question 6 on Statistical Review]
    None of the nine respondents said they were hearing about contract cancellations.
    • Mid-Tier Driller: “We are not hearing about contracts getting cancelled.”
  • Shorter Terms On Contracts
    [See Question 7 on Statistical Review]
    ​Two respondents said they have not entered into any contracts as demand has weakened. Four said that they are signing multi-month programs, while four said that they are signing well-to-well contracts. One of the respondents that said he was entering multi-month work said that for the right terms they were also doing some multi-year contracts. All of these are on much shorter terms than the respondents had seen in 2014.
    • Top-Tier Driller: “We haven’t entered a contract because we can’t even get work right now even though we have lowered our day rates to $15,000 or $15,500.”

End Survey Findings

Survey Demographics

H A R T E N E R G Y researchers completed interviews with nine industry participants in the land drilling segment in the Marcellus area. Participants included three oil and gas operators and six managers with drilling companies. Interviews were conducted during mid to late October 2015.

Part II. – Statistical Review

U.S. Land Drilling

[Marcellus]

Total Respondents = 9

[Oil & Gas Operators = 3, Drilling Companies = 6]

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

Remain the same:

2

Shrink:

7


2. Would you characterize the supply of rigs in your area as excessive, sufficient, or insufficient to meet fourth-quarter demand?

Excessive:

9


3. In percentage terms, what is your estimate of drilling rig utilization in your area?

40%:

3

45%:

6

Average Utilization:

43%


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

600 HP

$10,500

750 HP

$14,000

1000 HP

$18,000

$15,000

$10,000

1200 HP

$15,000

1500 HP

$18,000

$17,500

$16,000

2000 HP

$20,000

[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? By what percentage?

Flat 0%:

9

Average:

Flat


6. Are any contracts being cancelled and if so, what is the penalty?

No, this was happening earlier in the year:

9


7. How would you describe contractual market share in your area of operations? (Respondents gave more than one answer)

Multi-well (2 or 3 wells)/multi-month:

4

Have not entered a contract this year:

2

Well-to-well only:

4

Multi-year:

1


End Statistical Survey