Day Rates For Drilling Rigs Stabilize In Eagle Ford

Synopsis

Day rates for land drilling rigs are stabilizing in the Eagle Ford with the benchmark 1,500 HP Tier I AC-VFD unit going anywhere from $18,500 per day to $20,000. Contractors report rig rates are down 25% on average versus the fourth-quarter 2014. A small number of contractors participating in the current survey foresee additional downside to rig pricing of about 10-15% though most see rates as having bottomed. The biggest change has been the switchover from term contracts to well-to-well programs as operators grapple with lower commodity prices and take a “wait and see” attitude towards additional capital spending. Survey participants estimate regional drilling fleet utilization in the 45% range. According to Baker Hughes, horizontal rig count has stabilized in the Eagle Ford at slightly more than 100 units, or about half its peak level last Fall. Watch for the next land drilling report in September 2015.

Part I. – Survey Findings

Among Survey Participants:

• Rig Demand Mixed
  [See Question 1 on Statistical Review]
  ​Respondents were mixed on whether demand had grown worse in the last three months or had remained the same. In March, all eight respondents had said demand had shrunk QTQ, and in June, four said it has remained the same QTQ, while four said it had gotten worse.
  • Mid-Tier Operator: “For us, we haven't adjusted any plans from our January outlook, so we are holding steady. We are not convinced that we have seen the bottom yet, but I do believe we are getting pretty close.”

• Excessive Rig Inventory
  [See Question 2 on Statistical Review]
  ​All respondents agreed that there is an excessive amount of land drilling rigs in the Eagle Ford area. Two respondents said that rigs continued to be laid down, while two other respondents said that for every rig being laid down it seemed one was being picked up.
  • Top-Tier Driller: “We are still stacking rigs. As a matter of fact we have two more that we are about to lay down.”

• Utilization in the Eagle Ford is at 45%
  [See Question 3 on Statistical Review]
  ​Respondents said that rig utilization is somewhere between 40-50% in the Eagle Ford. Most agreed that utilization would continue to hover in the 45% range until mid summer.
  • Top-Tier Driller: “We are above 40%, but we are doing better than the market.”

• Rig Day Rates Under Pressure.
  [See Question 4 on Statistical Review]
  ​The day rates in the Eagle Ford area for a 1500 HP AC rig varied ranged from $18,500 to $20,000. Rig rate averages given by survey participants can be seen in Table I below.
  • Mid-Tier Operator: “The drilling vendors have been the hardest hit, but I think they still have more pain to come.”

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

• Rig Rates Down 3% QTQ
  [See Question 5 on Statistical Review]
  ​Only two of the eight respondents said that rig rates would drop further in the next three months. The six respondents who said that rates would remain the same agreed that prices had dropped on average 25% year-over-year but did not expect them to drop further. Two respondents said that prices had dropped 25%, but that they could go 10-15% lower still.
  • Mid-Tier Operator: “Rates have dropped about 25% to 30% since the first of the year, but I don’t expect they will drop further.”

• Contracts Holding in Eagle Ford area
  [See Question 6 on Statistical Review]
  ​Most of the respondents said that they have not heard of contracts being broken or paid off by operators. This was a change from first-quarter 2015, when most of the respondents had said they were hearing of contracts being paid off or cancelled.
  • Mid-Tier Operator: “We still have some contracts we are working on, and there have been some negotiations, but for the most part they are intact.”

• Most Contracts are Well-to-Well
  [See Question 7 on Statistical Review]
  ​Seven of the eight respondents said there has been a change from long-term (one to three year) contracts in the Eagle Ford to a well-to-well basis. One respondent said that he had been on well-to-well for the past three years, so there has been no change for his company.
  • Mid-Tier Operator: “We have had a variety of issues. Some contracts have stayed the same; some have been renegotiated, and others have been cancelled. There are penalties in some and others have clauses that help to work out a cancellation. So it really depends.”

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 Eagle Ford area. Participants included five oil and gas operators and three managers with drilling companies. Interviews were conducted during early June 2015.

Part II. – Statistical Review

U.S. Land Drilling – Eagle Ford

Total Respondents = 8

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

1. Do you expect demand for drilling rigs to grow, remain the same, or shrink in second-quarter 2015 compared to the first quarter?
Remain the Same: 4
Shrink: 4

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

3. In percentage terms, what is your estimate of drilling rig utilization in your area?
40% 3
45% 1
50% 3
Don’t Know 1
Average Utilization 45%

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 three months? By what percentage?
Flat 0% 6
Down 10% 1
Down 15% 1
Average Down 3%

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

7. How would you describe contractual market share in your area of operations?
Well-to-well, change from 2014 yearly contracts 5
Still sign multi-year contracts 1
40% of Eagle Ford is contract 1
No contracts 1

End Statistical Survey