Day Rates For Midcontinent Premium Rigs Down 40%

Synopsis

Spot market rig rates have fallen 40% for premium Tier I rigs in the Midcontinent and 36% on average for all other rig classes in concert with the collapse in drilling activity. Operators are only drilling to hold leases outside the Cana Woodford/Scoop play where rig count remains static. Roughly half of regional drilling activity is on a well-by-well basis with operators elsewhere finishing out contracted drilling programs and holding off on renewing contracts and activity. Spot market rates are anecdotal because of a lack of demand for drilling services. Contractors meanwhile are folding add ons, such as top drives, back into the day rate, further exasperating the steep decline in pricing. A few survey respondents indicated operators are looking towards late third quarter before venturing back into the market. Watch for the next Midcontinent land drilling survey in July 2015.

Part I. – Survey Findings

Among Survey Participants:

• Rig Demand Falling QTQ
  [See Question 1 on Statistical Review]
  ​Demand for land drilling rigs weakened in second-quarter 2015 versus first-quarter 2015 as continued low oil prices forced operators to scale back drilling. Only one of eight respondents, a major player, said demand had remained steady as they have kept levels similar to 2014. Otherwise, wells under contract are being drilled for leasehold, but work has scaled back significantly in most Midcontinent basins.
  • Mid-Tier Operator: “We are experiencing a major slowdown since January and pulled the horns in and shut some wells down. It looks like they will come back in late summer and early fall.”

• Excessive Rig Inventory
  [See Question 2 on Statistical Review]
  ​All respondents said that rigs have been stacking in the Midcontinent for the first four months of the year; however one respondent said he has also seen a major operator hire some rigs recently. Compared to the January report, the number of idle rigs has increased significantly.
  • Mid-Tier Driller: “Last we spoke I had three out of six rigs working in January now I have one working as of this week.”

• No Newbuilds Ordered for the Midcontinent
  [See Question 3a and 3b on Statistical Review]
  ​None of the respondents had newbuilds on order in the Midcontinent area nor do they expect that companies will be ordering new rigs given the amount of rigs available.
  • Top-Tier Driller: “There are no newbuilds. There has been a greater than 50% reduction in rigs out here.”

• Rig Day Rates Under Pressure
  [See Question 4 on Statistical Review]
  ​The ranges for rig rates in the Midcontinent vary from $11k to $14.5k for 1500-hp rigs. This represents a dramatic decrease since January when respondents quoted a range of $18k to $26k in first-quarter 2015. 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 Midcontinent area
[Rates shown are an average ‘per day’ rate among all respondents in the category.] (k = thousand)

*Two sources reported SCR rates as low as $8k/day for 1200 hp rigs not seen above.

• Rig Rates Down 36% QTQ
  [See Question 5 on Statistical Review]
  ​All respondents said that rig day rates had dropped QTQ by 36% on average due to almost a near shut down in the area by most operators. Rig rates are expected to stay under considerable pressure if oil prices do not go back up. Furthermore, with gas prices down as well, it is the perfect storm in the Midcontinent area.
  • Mid-Tier Driller: “There are some operators who want to drill, but they can't sell the well as there are no investors.”

• Short-Term Work Only
  [See Question 6 on Statistical Review]
  ​Half of the respondents said they are operating well-by-well and not with a long-term contract. Three of the respondents said that they were completing contracts that were in place, but those contracts are ending and not renewing. One respondent said that majors have bought out some contracts in lieu of drilling.
  • Top-Tier Driller: “No wells are being drilled except for those very few large players that are finishing up work.”

• Strategy for 2015 is to ‘Hold Tight’
  [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 supervisors only working on it until they saw demand picking up. One said he had heard a major operator was adding rigs right now. One respondent claimed that the surplus is shrinking and that would prompt operators to start completions. 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.
  • Mid-Tier Driller: “I don't have a clue because everything is speculative. So much being thrown into our bids, so there is no way to even calculate what the day rates are now because we are offering top drives and other stuff, it's a guess. I wish I had a little more confidence in telling you which way this is going to go. It helps to stay positive and there are still a few things going on but they are ‘onesies’ and ‘twosies’ and nothing like what it was.”

• Most are Completing Wells Drilled
  [See Question 7 on Statistical Review]
  ​Six of the respondents said that the wells being drilled are all being completed. Two of the respondents said they had heard that some operators are not completing the wells, but most believed that this requires having money to make those decisions.
  • Mid-Tier Operator: “We are completing every well we drill.”

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 Midcontinent area. Participants included two oil and gas operators and six managers with drilling companies. Interviews were conducted during April 2015.

Part II. – Statistical Review

U. S. Land Drilling

[Midcontinent]

Total Respondents = 8

1. Do you expect demand for drilling rigs to grow, remain the same, or shrink in second-quarter 2015 compared to first-quarter 2015?
Remain the Same 1
Shrink: 7

2. Would you characterize the supply of rigs in your area as excessive, sufficient, or insufficient to meet 2015 demand?
Excessive 9

3a. In your area, do you expect there will be an influx of newbuild rigs during the next six months?
No: 9

3b. What size and type of rigs do you expect will come into the market?
Not applicable 9

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 %?
Down 25% 1
Down 30% 2
Down 40% 5
Average Down 36%

6. Are any contracts being cancelled and if so, what is the penalty?
No contracts, well-by-well 4
Contracts are being completed then dropped 3
Majors buying out contracts 1

7. What strategies are being put in place to cope with low oil prices?
No strategy, 100% rigs down 2
100% rigs down, will pick up slowly 1
Majors adding rigs, settling at $50/barrel 1
Surplus is shrinking, so will start fracking soon 1
Uncertain 1
Anything that will cut costs 1
Working with partners to maintain 1

8. What are you seeing in terms of the number of wells drilled versus completed?
Wells drilled are being completed 6
Operators are drilling and not fracking 2

End Statistical Review