Survey Demographics

Hart Energy researchers completed interviews with eight industry participants in the land drilling segment in the Permian Basin area. Participants included four oil and gas operators and four managers with drilling companies. Interviews were conducted during December 2014.

Part I. – Survey Findings

Among Survey Participants:

  • Rig Demand Weaker QTQ [See Question 1 on Statistical Review]. Four respondents said demand had slowed QTQ, while four said drilling was under long-term contracts and so had continued steady QTQ; however, all respondents were cautious about demand and pricing going into 2015. All of the respondents said they are watching the market and strategizing about how they would respond in the near-term.
    • Top-Tier Operator: “Well, I think these [E&P] companies are dropping rigs like hot potatoes. Our rig count is already down. The majority of the [E&P] companies that will stay with drilling are under contract. What I understand from other operators is they have already let rigs go, but the term on leases or assignments will force some to drill or lose the acreage. I firmly believe we will see a major correction in service costs. I think it is immediate and these drilling companies are starting to see rigs come back to their yard.”
  • Sufficient Rig Inventory [See Question 2 on Statistical Review]. All but one respondent said there is sufficient rig inventory in the Permian, however, one said that there are already rigs stacking up and it is an excessive amount. The four respondents, who had seen steady demand, were also cautious about what they had been hearing in the market about pricing and contract terms changing due to the lower oil prices.
  • Mid-Tier Driller: “There are others that are interested in rigs in the Permian. We’ve had some of our rigs being released and they haven't lost revenue yet, but all that is out there and about to come.”
  • Newbuild Orders Slow in the Permian Basin [See Question 3a and 3b on Statistical Review]. Demand for rigs is softer QTQ according to half of the respondents; however all said that there is no demand for newbuilds currently in the Permian Basin.
    • Mid-Tier Driller: “We are already seeing rigs returning to the yard and they aren't moving them.”
  • Rig Day Rates Remain Steady [See Question 4 on Statistical Review].The range for rig rates in the Permian Basin ragnes $21k to $23.5k for 1500 HP depending on whether they are mechanical, SCR, or AC Power. More than half of the respondents said that prices had just begun to decrease, coming off highs recorded in 3Q14. Rig rate averages given by survey participants can be seen in Table I below.
    • Mid-Tier Operator: “We are in the process of going to our service providers to get them to back off. Some have already volunteered, but we are not seeing the 15% to 20% reduction that we need. When your revenue drops and don't see service costs drop -- that's a problem.”

  • Rig Rates Flat Next Three Months [See Question 5 on Statistical Review]. Six respondents said that rates had decreased QTQ and they expected that rates would continue to be weak going into 2015. Two respondents said that prices had not decreased and that they held long-term contracts and were not expecting to drop prices.
    • Mid-Tier Driller: “The market sets the rate and the market sets the demand, some of these people are only going to drill if they have to hold acreage. We are going to go to our operators and extend our contract at a rate that we can get to try to get through the rough spot.”
  • Demand Sours in Near-Term [See Question 6 on Statistical Review] Two respondents said that newbuilds are coming into the Permian with no buyers. Another two respondents said they are expecting contractors to offer price reductions, while one driller said he is renegotiating rates and terms with operators. Three respondents said they had not seen any changes, but were cautious about the near-term effects of lower oil prices.
    • Mid-Tier Driller: “Newbuilds are coming into the market with no buyers. In 2015, we’ll be right back to the same thing and sit here and watch the stock market. I had a contract recently because of an AFE that had been $24/foot to drill. That’s what the operators wanted to pay, but we can't drill for $24 a foot so we were charging $35. That’s a big price difference and we have the same risk for a lot less money. Rates have already dropped 10% QTQ.”
  • 2015 Demand Remains Questionable [See Question 7 on Statistical Review]. Four respondents said that demand would be down in 2015, while three said they are cautious and watching the market to respond. One respondent said that companies are so well hedged now that the Permian would not see any big changes until mid-2015.
    • Mid-Tier Driller: “The operators are in a completely different situation than times passed because all are well hedged and managing their finances better, so I don’t expect an impact to the top line until the hedges run out and that would be around mid-year next year.”

Part II. – Statistical Review, U. S. Land Drilling

Total Respondents = 8 [Oil & Gas Operators = 4, Drilling Companies = 4]

1. Do you expect demand for drilling rigs to grow, remain the same, or shrink in 4Q14 compared to 3Q14?

Remain the Same: 4

Shrink: 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?

Excessive: 1

Sufficient: 7

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)

*These respondents do not charge day rates.

5. Do you expect rig day rates to increase, remain the same or decrease over the next 3 months?

Remain the Same (0%): 2

Down (average 9%): 6

6. What has been the near-term effect on activity in your area due to the drop in the price of oil?

Newbuilds coming to market with no buyers: 2

Expecting contractors to offer price reductions: 2

Renegotiating with operators on rate/terms: 1

Nothing yet, but will see slowdown in 2015: 3

7. Looking forward to 2015, what are your expectations for rig demand if the oil price hovers around $80?

Same, everyone well hedged to mid 2015: 1

Down: 4

Not sure, will respond to environment, cautious: 3