Synopsis

Regional capacity utilization for land drilling units has fallen to 25% over the last year, according to Appalachian Basin drilling contractors.

The drop reflects the 76% decrease in active rig count that Baker Hughes Inc. (NYSE: BHI) reported in early February 2016.

Like their counterparts in the workover segment, land drillers polled in the current Hart Energy’s Heard in the Field survey say prices need to rise above $50 for oil and $3 for natural gas before Appalachian drilling activity recovers.

Pricing for drilling rigs hit a new low in the region with the average rate for a 1,500 horsepower (hp) Tier I AC-VFD unit down 16% over the last 90 days to $15,000. That average equals the spot market rate for big rigs and suggests only a few long-term contracts remain in the region.

Several contractors are stacking equipment for 2016 and the only contractors working at the moment are those who are finishing out pre-existing contracts.

One 15-rig drilling contractor has shut down its drilling division while several survey participants pointed to at least one other small driller is looking at closing its doors in the current environment. Indeed, one survey participant noted his own mid-tier company was under economic pressure and looking to stack out its rigs for 2016.

Expectations for a 2016 recovery has evaporated for contractors over the last 90 days.

Watch for the next Heard In The Field report on the Appalachian Basin drilling market in May 2016.

Part I. – Survey Findings

Among Survey Participants:

  • 2016 Outlook Rocky In Marcellus
    [See Question 1 on Statistical Review]
    All eight respondents said that 2016 outlook is rocky at best. Six respondents said demand for rigs had remained the same during the past three months, but two said it had lost ground. Four respondents are operating at roughly 25% capacity vs. last year.
    • Top-Tier Drilling Manager: “Rates are severely depressed right now and so many operators have plans to do nothing in 2016. We are on a shoestring budget.”
  • Oil Prices Need To Increase To $50-$55
    [See Question 2 on Statistical Review]
    ​Respondents were mixed about what the price of oil needs to be for drilling demand to increase. Three respondents thought demand would improve if oil could climb to $50 to $55 (per barrel). However, two drillers said it is really up to the oil companies to decide what they can tolerate and another three drillers said that any price higher than the current price is what is needed.
    • Mid-Tier Drilling Manager: “Oil needs to be in the $50 to $60 [per barrel] range. That’s the threshold. It depends on which customer and could vary a little bit.”
  • Natural Gas Prices Need To Reach $3
    [See Question 3 on Statistical Review]
    ​Three respondents said natural gas prices need to increase to $3 to $4.50 for drilling demand to improve. Two respondents said anything but the current prices would help demand. An operator explained that his company works on current natural gas prices in Northern Appalachia and not NYMEX prices. Another two drillers said operators alone make the decision at what gas prices need to be before committing to more drilling.
    • Mid-Tier Drilling Manager: “Gas prices between $4 and $5 is a definite plus, but—we've been down so long with gas—it makes it difficult to know what it would take to bring back demand.”
  • Day Rates Lower For High Horsepower Rigs
    [See Question 4 on Statistical Review]
    ​Day rates in the Marcellus Shale for a 1,500 hp AC-VFD rig average $15,000. Rig rate averages given by survey participants can be seen in Table I below.
    • Top-Tier Drilling Manager: “It doesn’t matter what the rig rate is at this point because no one is working. I've been in this business for 19 years and have never seen it this bad. Now I'm realizing this might be it and that the market is going to evaporate. I’ll need to figure out what to do next.”

Table I – Average Day Rates For Marcellus Rigs

Size

AC Power

Diesel/SCR

Mechanical

750 hp

$9,000

$7,500

1000 hp

$12,000

$9,000

1500 hp

$15,000

$12,000

$11,000

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

  • Rates To Remain Stable And Low
    [See Question 5 on Statistical Review]
    ​All eight respondents said that rates for drilling rigs are so low right now that they cannot imagine them going lower and should remain the same during the next three months.
    • Top-Tier Operator: “Those with the best day rates are surviving, but we have not seen prices for the big rigs go below mid-teens yet.”
  • Very Little Drilling Activity in Marcellus
    [See Question 6 on Statistical Review]
    ​All eight respondents said there is very little drilling activity in the Marcellus Shale area. One respondent said that all drillers are in a “wait and see” mode, while three said there is hardly any company active right now. Two said they are still operating at 25% capacity.
    • Top-Tier Drilling Manager: “Patterson seems to be doing pretty well, but they have a quite a few rigs coming off contract this year. They're probably the most active around. Precision has done relatively well. Anyone working for Antero is doing okay because they have a nice rig fleet, but who knows how long that lasts.”
  • Companies Shutting In, Not Packing Up
    [See Question 7 on Statistical Review]
    ​Six of the eight respondents said that most companies are not leaving the area, but are shutting down operations until commodity prices pick up.
    • Top-Tier Drilling Manager: “We are operating at 30% capacity and other drillers are continuing to work on what they have on long-term contract.”
  • Some Companies are Shutting Doors Permanently
    [See Question 8 on Statistical Review]
    ​Three respondents said they have not heard of companies going out of business, while three said that mom and pops are closing their doors permanently. One survey participant said his parent company is not doing well and another mentioned that a 15-rig privately-held company was shutting its drilling division down while several contractors pointed to a five-rig privately held firm that was struggling in the current environment.
    • Top-Tier Drilling Manager: “No major contractors are leaving the area but some mom and pops have closed.”

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 Shale. Participants included two oil and gas operators and six managers with drilling companies. Interviews were conducted in late January 2016.

Part II. – Statistical Review

U.S. Land Drilling

[Marcellus Shale]

Total Respondents = 8

[Oil and gas operators = 2, Drilling companies = 6]

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:

6

Shrink:

2


2. What would oil prices (per barrel) have to be for demand for drilling rigs to improve?

$55:

2

$50:

1

Anything over $28:

2*

Undetermined:

3

Range:

$50-$55

*Not used in range figures


3. What would natural gas prices (per thousand cubic foot) have to be for demand for drilling rigs to improve?

$4.50:

2

$3:

1

Undetermined:

4

$1 in Northern Appalachia not the NYMEX:

1*

Range:

$3-$4.50

*Not used in range figures


4. 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

Mechanical

750 hp

$9,000

$7,500

1000 hp

$12,000

$9,000

1500 hp

$15,000

$12,000

$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? By what percent?

Flat (0%):

8

Average:

Flat


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

Very few drilling companies active right now:

6

Patterson-UTI Energy, Precision Drilling:

1

Helmerich & Payne:

1


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

None have left but many have shut down:

8


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

Small, unnamed companies may be closing their doors:

3

None I know of yet:

4

One closing and one struggling:

1


End Statistical Survey