Drillers Note Additional Cuts In Field Work

Synopsis

The Eagle Ford Shale resembles a ship with the engines cut to idle as it drifts towards docking after the latest commodity price drop works its way through the region. The regional emphasis involves cutting back on drilling while looking for ways to improve completions to maintain production levels. More rigs are slated to be laid down over the next 90 days in response to deteriorating market conditions once existing projects are completed. Contractors participating in the Hart Energy survey cite regional drilling rig utilization at 46% on average with no expectations that it will improve in 2015 and may, in the minds of some survey participants, deteriorate further. Rig rates for the benchmark 1,500 HP AC rig (the flagship unit working the Eagle Ford) now range between $18,000 and $19,000 per day, down more than 30% vs. the 2014 peak. However, contractors are reporting few bids or demand for additional drilling and note that many rigs working now will stack out once their current program is completed. Watch for the next Eagle Ford drilling market update in December 2015.

Part I. – Survey Findings

Among Survey Participants:

• Rig Demand Rocky
  [See Question 1 on Statistical Review]
  ​After stabilizing for all respondents in early June, demand for land drilling rigs moved to mixed in August. Three respondents said that demand had diminished quarter-to-quarter, while five continued to see demand steady, but at low levels.
  • Mid-Tier Operator: “Oil prices are the lowest they have been in six years and everyone is going to try to minimize their cost and optimize their completions maintaining production. Only the small remedial jobs will continue to be done.”

• Excessive Rig Inventory
  [See Question 2 on Statistical Review]
  ​Similar to June, all respondents said there is an excessive of inventory in the Eagle Ford, and three respondents warned there will be more rigs laid down.
  • Mid-Tier Operator: “We heard about an operator that has had four rigs running. This week they will complete the last well with the last rig and will go from four to zero in nine months. This is being repeated over and over across the industry right now.”

• Rig Utilization Estimated At Less than 50%
  [See Question 3 on Statistical Review]
  ​Respondents estimated that rig utilization is at 46% on average in the Eagle Ford. Most agreed that utilization would continue to hover below the 50% range through the rest of the year.
  • Mid-Tier Operator: “We are down 50% from last year and think that 2016 we will be down another 50%. Anyway, that is what we are forecasting.”

• Rig Day Rates Stable, But Low
  [See Question 4 on Statistical Review]
  ​Day rates in the Eagle Ford area for the benchmark 1500 HP AC rig varied between as low as $18,000 to $19,000. Rig rate averages given by survey participants can be seen in Table I below.
  • Mid-Tier Operator: “Prices cannot go any lower for contractors, because they will go out of business.”

• Rig Rates Flat Quarter-To-Quarter
  [See Question 5 on Statistical Review]
  ​Respondents said that rates are flat quarter-to-quarter. Despite the fact that oil prices had dropped further in the summer and demand had stepped back for three respondents, all agreed that prices had not dropped further because of the rate cuts that happened in the first half of the year.
  • Mid-Tier Operator: “You cannot make money at these prices, but I don’t see anyone cutting the prices.”

• No Recent Contract Cancellations Or Renegotiations
  [See Question 6 on Statistical Review]
  ​All of the respondents said that there had not been any recent slate of cancellations in the Eagle Ford area because most of the contracts that were renegotiated or cancelled happened in the first six months of 2015.
  • Top-Tier Driller: “We have had some operators drop out, but they were not cancelling contracts.”

• Contracts Are Few With Demand Low
  [See Question 7 on Statistical Review]
  ​Respondents could not comment on contracts saying that there was very little work demand in the quarter with very few term contracts being signed.
  • Mid-Tier Operator: “There are no new contracts right now because there is no work.”

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 seven oil and gas operators and one manager with a drilling company. Interviews were conducted during mid to late August 2015.

Part II. – Statistical Review

U.S. Land Drilling

[Eagle Ford]

Total Respondents = 8

[Oil and gas operators = 7, Drilling companies = 1]

1. Do you expect demand for drilling rigs to grow, remain the same, or shrink in third-quarter 2015 compared to the 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 market share in your area of operations?

End Statistical Survey