Horizontal Drilling Down 40% From Peak

Synopsis

Round two of rig count reduction is underway in the Permian Basin. Initially operators quit drilling Wolfberry wells and other vertical targets in response to falling oil prices in early 2015. Operators have extended rig reductions to horizontal drilling over the last six weeks. Horizontal drilling is down 140 units or almost 40% from peak. Pricing has followed suit and is off 21% on average over the last quarter for Tier I units, which are stacking out as quickly as lower tier rigs. As noted in other markets, average pricing for 1,500 HP Tier I units has now dropped below $20,000 per day. Watch for the next Permian Basin drilling update in June 2015.

Part I. – Survey Findings

• Rig Demand Falling QTQ
  [See Question 1 on Statistical Review]
  Demand for land drilling rigs weakened in 1Q15 versus 4Q14 as low oil prices caused operators to slow drilling activity. All respondents said companies were being cautious in their budget allocations for land drilling. Only one of the ten respondents said that their slate of business remained steady QTQ.
  • Mid-Tier Driller: “Our company hasn't gotten slower, but we are seeing demand slow in the area. One major driller here has 35 rigs in their yard, stacking them out. We are actually taking two more rigs out this week. People don't want to drop their day rates but we went with the market and dropped because we feel it is easier to keep a rig running and people working. We have dropped rates by 20% QTQ.”

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• Excessive Rig Inventory
  [See Question 2 on Statistical Review]
  All respondents said that rigs are stacking in the Permian Basin area and that they expect more will be laid down as the year continues.
  • Mid-Tier Operator: “I've got six rigs running out of 20 something. Vertical wells are nonexistent. People are cutting back from three to one rig is what I've experienced a lot in the vertical wells. We have rigs that can't convert to top drive that are not wide enough and we would have to re-engineer the derricks and the expense is not worth it. One major has 26 of these types of rigs stacking up in their yard. Another large player has 22 rigs.”

• Newbuild Orders Stall in the Permian Basin area
  [See Question 3a and b on Statistical Review]
  ​None of the respondents has newbuilds on order in the Permian Basin area nor do they expect that companies will be ordering new rigs given the amount of rigs available.
  • Mid-Tier Operator: “We have shut every rig down because we are not any smarter than anyone else, so we decided to preserve capital. No one is building new rigs in this environment.”

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• Rig Day Rates Under Pressure
  [See Question 4 on Statistical Review]
  The range for rig rates in the Permian Basin area is currently $15k to $23k in 1Q15 for 1,500 HP rigs. That range was $21k to $23.5k in 4Q14. All rates are being discounted from 20% to 25%. Rig rate averages given by survey participants are itemized in Table I below.
  • Mid-Tier Operator: “Rates would have drop by 30% to be meaningful with $45 oil prices. We have four wells we have to drill this year. Finding a rig is no problem.”

• Rig Rates Down 21% QTQ
  [See Question 5 on Statistical Review]
  ​All respondents said that rig day rates had dropped QTQ by 21% on average due to lower oil prices. Rig rates are expected to stay under considerable pressure if oil prices do not go back up.
  • Mid-Tier Operator: “We are going to slow down and not do anything we don't have to, so we will complete the wells we started. Rates haven't come down enough but there are a lot of rigs available, and prices are coming down.”

• Contracts Holding in Permian
  [See Question 6 on Statistical Review]
  ​Most companies are finishing out their drilling contracts and those that are not are paying the full day rate to buy out the contract. Respondents said the strategy is to finish the drilling contract but maybe not do the completion as most contractors have been willing to give rate concessions so the drilling is cheaper.
  • Mid-Tier Driller: “Operators are trying to get out of contracts, buying some of them out, but mostly companies, if you have a good relationship, will keep on drilling. They are taking advantage of the low drilling cost.”

• Maintain Cost and Workload for 2015
  [See Question 7 on Statistical Review]
  ​Strategies to cope with the lower oil prices were all over the board for the ten respondents. Three respondents said they would maintain costs and the workload for 2015 in reaction to current low oil prices. One respondent said they would finish out current drilling contracts and then sit back and wait to see what happens. Two respondents said that rates would have to come down further to make work feasible. One respondent said they had shut down their operation until the market stabilized. One respondent believed fracking prices would go down while oil started climbing back up, which would make for a favorable situation. One respondent said that more rigs would stack out.
  • Top-Tier Operator: “The stuff we are drilling is leasehold that has a continuous development clause we don't want to lose. We have other plays that make economic sense at this oil price but not in the unconventional resource plays, and that's what we are drilling and no more than that. We have a much more limited budget than we have had and we are not getting more money.”

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• Completions Down Slightly
  [See Question 7 on Statistical Review]
  ​Seven of the ten respondents said that companies are completing drilling contracts at lowered rates, but are not completing wells until the price of oil goes up and the cost of completion comes down. Three of the ten said that they are completing every well they are drilling.
  • Top-Tier Operator: “There are wells being drilled and not completed. Some have drilling contracts through August or are paying a huge lump sum to make it go away. Some have taken the approach to drill the well but not complete it because that is where a lot of the cost is, in the frack.

Survey Demographics

H A R T E N E R G Y researchers completed interviews with ten industry participants in the land drilling segment in the Permian Basin area. Participants included seven oil and gas operators and three managers with drilling companies. Interviews were conducted during March 2015.

Part II. – Statistical Review

U. S. Land Drilling

[Permian Basin]
Total Respondents = 10
[Oil & Gas Operators = 7, Drilling Companies = 3]

1. Do you expect demand for drilling rigs to grow, remain the same, or shrink in 1Q15 compared to 4Q14?
Remain the Same: 1
Shrink: 9

2. Would you characterize the supply of rigs in your area as excessive, sufficient, or insufficient to meet 2015 demand?
Excessive 10

3a. In your area, do you expect there will be an influx of newbuild rigs during the next six months?
No: 10

3b. What size and type of rigs do you expect will come into the market?
Not applicable 10

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 %?
Down (20%) 8
Down (25%) 2
Average Down 21%

6. Are any contracts being cancelled and if so, what is the penalty?
Contracts are being bought out 3
Hear operators are fulfilling drilling contract then not completing
wells 3
Not hearing of companies not fulfilling contracts 2
We are on well by well 2

7. What strategies are being put in place to cope with low oil prices?
Sit back and play out contracts in place 1
Maintain low activity 4
Day rates will have to go down further 2
Shutting operation down 1
Frack prices will go down and oil will go up 1
More rigs will stack 1

8. What are you seeing in terms of the number of wells drilled versus completed?
Wells drilled are being completed 3
Operators are drilling but not completing 7