Drilling Activity Erodes As Rig Count Declines

Synopsis

Bakken drilling activity continues to erode with rig count down more than one third from peak. Contractors are reporting the repercussions with average rig rates down more than 10% sequentially and discussion among contractors that rates could fall 30% if oil pricing stays low. The Bakken may be an industry bellweather. It was the first region to report activity topping out, as quoted in the November 2014 Heard in the Field. Watch for the next update on the Bakken drilling market in May 2015.

Part I. – Survey Findings

Among Survey Participants:

• Rig Demand Falling QTQ

[See Question 1 on Statistical Review]

Demand for land drilling rigs was softer in 1Q15 vs. 4Q14 for seven of the eight respondents, with all saying that rigs are stacking out in the area due to lower oil prices. All respondents are concerned that if oil prices continue to be low, demand for drilling, rig count and day rates will drop by the mid double digits.

Mid-Tier Driller: “We are not putting our rigs on the market and competing with other drilling contractors because we are in a unique position and drill for ourselves. We have reduced our day rates like everyone else and feel if low prices maintain like they are right now, we will go forward but will slow down our operation. There is definitely a lot of people that are making corrections and there are a lot of rigs stacked out.”

• Excessive Rig Inventory

[See Question 2 on Statistical Review]

The rig count has gone down considerably in the Bakken Shale and all respondents said that there is an excess of rigs in supply now.

Mid-Tier Driller: “The rig count doesn't look good if oil prices continue to be low. So far, we have 130 rigs in the Bakken from 190 just last November. This is a significant decrease.”

• Newbuild Orders Stall in the Bakken Shale area

[See Question 3a and 3b on Statistical Review]

One of the seven respondents has two rigs on order, but the majority of the respondents said that no newbuilds are on order. Respondents do not expect to see any new rigs in the near future as rigs are stacking out in the Bakken Shale.

Mid-Tier Operator: “We have two newbuilds on order and will take possession of them both this year. We had been expecting to get $27k to $29k for a day rate on them, but if we were able to get them to work, the day rate would be $24k or $25k now.”

• Rig Day Rates Under Pressure.

[See Question 4 on Statistical Review]

The range for rig rates in the Bakken Shale area was $20k to $29k in 4Q14 for 1500 HP with A/C power. That range has come down to $18k to $27k in 1Q15. All rates are being discounted from 10% to 30%. Rig rate averages given by survey participants can be seen in Table I below:

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

Mid-Tier Driller: “Clients are asking for concessions and they are also laying rigs off. They are looking for discounts and 15% is the minimum. They have asked up to 30% and maybe they are asking for 30% in the hopes they get 15%.”

• Rig Rates Down 15% QTQ

[See Question 5 on Statistical Review]

All respondents said that rig day rates had dropped QTQ by 15% on average due to lower oil prices. Rig rates are expected to stay under considerable pressure if oil prices do not go back up. One respondent said that their rigs were more in demand due to lower rates.

Mid-Tier Driller: “We have taken a discount across the board to keep our rigs busy. If oil prices don't go back up, this discount will get greater as the year goes on.”

• 2015 Demand Remains Weak

[See Question 6 on Statistical Review]

Visibility into 2015 is murky for all respondents who said that if oil prices remain low then demand and rates would remain under pressure with additional rigs stacking and prices dropping lower. All respondents believed that the market has yet to hit bottom.

Top-Tier Driller: “We have no idea what is going to happen, but we have our life jackets on.”

• Drilling Contracts Hold in Bakken

[See Question 7 on Statistical Review]

Respondents said that most of the drilling contracts are well-by-well in the Bakken Shale area, but those that had contracts said penalties are written into each contract in different ways depending on the relationship. One respondent said that there is always the possibility of re-negotiating the penalty as well, with the operator making a promise that when they picked work back-up, they would contract with the same company.

Mid-Tier Driller: “We probably would not extend a long term contract with the uncertainty of the market. Most of our work is well by well. There are clauses in the contract that help cover the operators, but so far the operators we drill for haven't had to reduce our contract or shorten them. Penalties vary and each contract is worded a bit differently. We have good operators we are working with right now and they haven't asked for reduced rates and the contracts are good through the first of the fall. Our clients are all majors. True test will come when these contracts end.”

Survey Demographics

Hart Energy researchers completed interviews with eight industry participants in the land drilling segment in the Bakken Shale area. Participants included one oil and gas operator and seven managers with drilling companies. Interviews were conducted during February 2015.

End Survey Findings

Part II. – Statistical Review

U.S. Land Drilling Segment

[Bakken 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 3Q14 compared to 2Q14?

Grow: 4

Remain the Same: 4

2. Would you characterize the supply of rigs in your area as excessive, sufficient, or insufficient to meet the second half of 2014 demand?

Sufficient: 8

3a. In your area, do you expect there will be an influx of newbuild rigs during the next six months?

Yes: 5

No: 3

3b. What size and type of rigs do you expect will come into the market?

1500 HP A/C Power 5

Not applicable 3

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? By what %?

Increase (5% to 10%) 2

Remain the Same (0%) 6