Appalachian Drillers Fear Additional Activity Reductions

Synopsis

Although the Appalachian drilling market had stabilized, the recent drop in commodity prices is generating concern among drilling contractors that market conditions may worsen again. Contractors peg drilling rig utilization at 50%, about the same as the last survey in May, but are expressing fear it may go lower in the next few months, particularly if commodity prices fall farther. There are still a few instances where operators are letting previous contracted rigs go if the original price was high, though most new arrangements are on either a well-to-well basis, or term contracts of a few months duration. Spot market pricing for the benchmark 1,500 HP Tier I rig remains between $18,000 and $22,000 per day, or stable with the last survey. Average rates are down about 25% vs. the same period last year. Contractors say at this point it is not a question of rig pricing on whether units go back to work. Rather, it is a question of operator demand and operators are getting cold feet with the recent commodity price drop. Watch for the next Marcellus rig market report in November 2015.

Part I. – Survey Findings

Among Survey Participants:

• Rig Demand Steady Quarter-To-Quarter
  [See Question 1 on Statistical Review]
  ​All eight respondents said that demand was steady with no spikes or dips. Respondents were concerned that lower oil prices and the upcoming Iran deal might upset the newfound stability in the Marcellus Shale area.
  • Top-Tier Driller: “A month ago I would have said we hit bottom and were on the way back up, but now it seems that things have not started back up and now with news from a major and others, we are preparing for the worst. We have not hit bottom. We are trying to pick up the pieces right now—we don't expect our rig count to fall much more—we have bottomed out but not sure what the next phone call will hold.”

• Excessive Rig Inventory
  [See Question 2 on Statistical Review]
  ​All respondents agreed that there is an excessive amount of land drilling rigs in the Marcellus Shale area. Respondents believe that it is possible that more rigs might be laid down if oil prices stay down.
  • Mid-Tier Driller: “It is back down again. It had begun to inch up a little but now it is down with all the uncertainty in the Middle East. We are about to lay down another rig."

• Rig Utilization Estimated At 50%
  [See Question 3 on Statistical Review]
  ​Respondents said that rig utilization is at 50% in the Marcellus Shale. Most agreed that utilization would continue to hover in the 50% range through the third quarter and could possibly go lower if oil prices were to stay low or drop further.
  • Mid-Tier Driller: “Things are looking pretty grim right now. People are talking about oil going to $30 a barrel. If that happens, this whole thing will shut down. You cannot make money on $30 oil, you can lose money though.”

• Rig Day Rates Stable, But Low
  [See Question 4 on Statistical Review]
  ​The day rates in the Marcellus Shale area for a 1500 HP A/C rig varied from $18,000 to $22,000. Rig rate averages given by survey participants can be seen in Table I below:
  • Top-Tier Driller: “We are still hearing of instances of those with contracts laying rigs down depending on terms and price.”

• Rig Rates Flat Quarter-To-Quarter
  [See Question 5 on Statistical Review]
  ​Respondents said that rates are flat quarter-to-quarter. Respondents said that rates have dropped 20% to 25% year-to-year.
  • Top-Tier Driller: “Day rates are down about 20% to 25% from last year and are down as much as they are going to go. It is not a fact of taking them down another 10%; it is contingent on whether they can operate at all.”

• Contracts Holding In Marcellus Area
  [See Question 6 on Statistical Review]
  ​All of the respondents said that they have not heard of contracts being broken or paid off by operators. This was a change from the first half of the year, when most of the respondents had said they were hearing of contracts being paid off or cancelled.
  • Top-Tier Driller: “We have not entered into a contract all year. The contracts we have were in place from last year.”

• Most Contract Term Lengths Vary
  [See Question 7 on Statistical Review]
  ​Respondents said that contracts run from well-to-well to long-term contracts. However, two said they are not signing any contracts. One respondent said he is only doing well-to-well business. Five said they were signing a variation of multi-month to multi-year contracts.
  • Mid-Tier Driller: “We are getting ready to sign a contract. We put in bid for one or two years and we don't know which it will end up in. They are re-signing the rigs they got and it will most probably be one year. I don't see them going much longer than that. But, there are a lot running well-to-well because they want to cut ties in a hurry.”

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 area. Participants included three oil and gas operators and five managers with drilling companies. Interviews were conducted during late July 2015.

Part II. – Statistical Review

U.S. Land Drilling

[Marcellus Shale]

Total Respondents = 8

[Oil & Gas Operators = 3, Drilling Companies = 5]

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

2. Would you characterize the supply of rigs in your area as excessive, sufficient, or insufficient to meet third-quarter 2015 demand?

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

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?

5. Do you expect rig day rates to increase, remain the same or decrease over the next three months? By what percentage?

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

7. How would you describe contractual marketshare in your area of operations?

End Statistical Survey