Appalachian Drillers Prepare For Next Round Of Rig Releases

Synopsis

Tougher times are on tap for land drillers in the Appalachian Basin. After an initial drop in rig count at the first of the year, the region had leveled out. It was a nice contrast to the rest of the U.S. market where rig counts continued to decline at precipitous rates. However, contractors now expect Appalachian rig count to fall more than a dozen rigs by early summer as operators finish out drilling programs with previously contracted units. In fact, the only drilling occurring is to complete existing contracts or to retain leasehold, according to contractors. Pricing has dropped to $20,000 per day on average for 1,500 horsepower Tier I rigs. Overall, land rig pricing dropped as much as 40% versus peak with contractors working at near breakeven cost. Furthermore, contractors expect pricing to drop about 20% over the next 90 days as utilization of the region’s fleet has fallen to about 50% of available equipment. The challenge with determining a leading edge rig rate is that there is little demand for drilling services at the present time. Watch for the next Marcellus drilling update in August 2015.

Part I. – Survey Findings

Among Survey Participants:

• Rig Demand Falling QTQ
  [See Question 1 on Statistical Review]
  ​All respondents said that demand continued to weaken in the Marcellus Shale area since the first of the year. Three respondents said that they had lowered rig rates to almost cost and still their rigs were released.
  • Mid-Sized Operator: “I have visited with a number of folks over the last few weeks and most of them will be laying down additional rigs this summer as they come off of long-term contracts.”

• Excessive Rig Inventory
  [See Question 2 on Statistical Review]
  ​The number of rigs that are idle in the Marcellus is hovering around 50%, but some rig contractors’ fleet utilizations are less than that, including some that have 100% of their rigs stacked.
  • Mid-Tier Driller: “We have dropped our day rates significantly to $13.5k from $25k and have been equally aggressive on the mobilization part because we own our own trucks. But the problem is, no one is talking about drilling.”

• No Newbuilds Ordered for the Marcellus Shale
  [See Question 3a and 3b on Statistical Review]
  ​Newbuilds are not being ordered for the Marcellus area. Some newbuilds that were on order were either delivered or were delivered elsewhere because they are not needed in the area. Most respondents said that they are making sure to keep existing equipment maintained.
  • Top-Tier Operator: “Operators are sorting through their rig inventory and using this time to upgrade and lower prices at the same time. There were four cancellations on new rigs that had three-year contracts. Those contracts were paid off and they said don't even bring them to the area and just leave them in Houston. I am personally aware of four of those incidents where that happened. A new rig may come up here because operators are putting it into use and different operators have different idea of what makes sense.”

• Rig Day Rates Still Under Pressure.
  [See Question 4 on Statistical Review]
  ​The day rates in the Marcellus Shale area for a 1500 HP A/C rig did not vary. All respondents said that prices had dropped at the average day rate is $20k. Rig rate averages given by survey participants can be seen in Table I below:
  • Mid-Tier Driller: “Rates are lower by 40%; the people who have locked stuff up and who are losing leases are the only ones drilling.”

Table I – Average Day Rates for Certain Rigs Sizes in Marcellus Shale Area
[Rates shown are an average ‘per day’ rate among all respondents in the category.] (k = thousand)

• Rig Rates Down 21% QTQ
  [See Question 5 on Statistical Review]
  ​All respondents said that rig day rates had dropped QTQ by 21% on average as operators have only been drilling what is necessary in the Marcellus Shale. Rig rates are expected to stay under considerable pressure if oil and gas prices do not go back up.
  • Mid-Tier Operator: “Our first rig that rolls off contract is in June and we will be letting that rig go. You might have that situation with other operators because the contracts haven't finished yet. If it wasn't under contract—it would have been laid down already. We are going from four horizontal to three rigs.”

• Contracts Holding in Marcellus Shale
  [See Question 6 on Statistical Review]
  ​Most of the respondents said that they have not heard of contracts being broken or paid off. One respondent said that he knows first-hand of a contract for four new rigs that was paid off, but the rigs were left in Houston because they were not needed.
  • Mid-Tier Operator: “One way to get out of a contract is we had a number of rigs [five] on order and we only needed three, so we dropped two and added extra time to the existing ones.”

• Strategy for 2015 Varies Among Respondents
  [See Question 7 on Statistical Review]
  ​Two respondents said that they do not have a strategy with all of their rigs laid down. One said that the rigs are all down right now, but if it picked up they would only employ one rig and outfit it with all the supervisors working on it until they saw demand picking up for a while. One said he had heard a major was adding rigs right now. Another respondent said they were doing anything they could to cut costs, while a major operator said they were trying to maintain at last year’s level.
  • Top-Tier Operator: “We hit a peak back in December in the Marcellus and Utica and it has been steadily declining. From 80 to 90 rigs, we dropped off and expect another ten to 15 rigs to be dropped by summer. It will stabilize at that count.”

• Most are Completing Wells Drilled
  [See Question 8 on Statistical Review]
  ​Most of the respondents said that wells are being completed. Some have heard of wells not being completed, however. There are reports of a number of wells that have been drilled and not fracked, but one respondent said that is no more than is usual in the Marcellus at any given time.
  • Top-Tier Driller: “There was a report that 4,700 wells have been drilled and cased, but haven't been fracked. They will frack those wells first before they go back to serious drilling. That would take a price increase of oil prices moving up to mid $70s. Realistically, we still have a lot of supply and excessive supply will keep prices down.”

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/Utica region. Participants included one oil and gas operator and seven managers with drilling companies. Interviews were conducted during early May 2015.

Part II. – Statistical Review

Vertical: U.S. Land Drilling

[Marcellus Shale]

Total Respondents = 8

[Oil & Gas Operators = 1, Drilling Companies = 7]

1. Do you expect demand for drilling rigs to grow, remain the same, or shrink in 2Q15 compared to 1Q15?
Shrink: 8

2. Would you characterize the supply of rigs in your area as excessive, sufficient, or insufficient to meet 2015 demand?
Excessive 8

3a. In your area, do you expect there will be an influx of newbuild rigs during the next six months?
No: 8

3b. What size and type of rigs do you expect will come into the market?
Not applicable 8

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? [Rates shown are an average ‘per day’ rate among all respondents in the category.] (k = thousand)

5. Do you expect rig day rates to increase, remain the same or decrease over the next 3 months?
Down 10% 1
Down 20% 5
Down 25% 1
Down 30% 1
Average Down 21%

6. Are any contracts being cancelled and if so, what is the penalty?
No cancellations 8

7. What strategies are being put in place to cope with low oil prices?
Cut Costs Wherever Possible 1
Maintain equipment 1
Upgrade equipment and lower prices 1
Ramp up, look for opportunity 1
Lower prices 3
Put more sales people in the field 1

8. What are you seeing in terms of the number of wells drilled versus completed?
Hearing wells are not being completed, but we are 4
Wells not being completed at normal ratio 3
Heard that an operator got out of newbuild contract 1

End Statistical Review