Synopsis

The activity decline impacting the nation’s oil plays has now come to gas-directed plays like the Marcellus as demand for drilling services falls, pricing decreases and rigs lay down in a rapidly deteriorating market. As one respondent told Hart Energy, “It is a cutthroat white-knuckle market.” Pricing is down 23% currently on average versus the last quarter and rigs are unable to find work once contracts expire due to operator capex cuts. Contractors participating in this quarter’s survey used terms like “dire”, “suicide watch” and “lay offs”. The attitude has deteriorated noticeably since the last drilling survey in November when contractors first pointed to newbuild order cancellations, signifying the downturn had begun. Look for the next Marcellus drilling update 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 all respondents, with most saying that rigs were stacking out due to the lower oil prices. All respondents are concerned that if oil prices continue to be low, demand for drilling services, rig count and day rates will drop into the mid-double digits. All respondents said that the situation has grown dire in the last few weeks.

  • Anecdotal Information/Quotable:

Mid-Tier Driller: “A couple of operators have sent letters saying times are tough so please drop rates by 20% or we will cancel. It is a cutthroat, white-knuckle market. I have no idea what’s going to happen next.”

  • Excessive Rig Inventory

[See Question 2 on Statistical Review]

Lower oil prices are leading contractors to lay down rigs while operators scuttle drilling plans. All respondents said there is an excess of rig inventory in the Marcellus Shale area.

  • Anecdotal Information/Quotable:

Mid-Tier Driller: “The ways rigs are dropping right now and the way the oil prices are reacting I can see us being down 500 rigs by mid-year.”

  • Newbuild Orders Stall in the Marcellus Shale area

[See Question 3a and b on Statistical Review]

Currently, all respondent said that newbuild orders have stalled and that any newbuilds on order are not likely to be put into service.

  • Anecdotal Information/Quotable:

Mid-Tier Operator: “In my contracts, like in the standard IADC contracts, there is always an early termination clause, but it gets watered down in the negotiation.”

  • Rig Day Rates Down Low Double Digits.

[See Question 4 on Statistical Review]

The range for rig rates in the Marcellus Shale area was $18k to $30k for 1,500 horsepower units with AC power. All rates are being discounted from 15% to 30%. Rig rate averages given by survey participants are listed in Table I below:

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

AC Power

SCR/Diesel

Conv. Mech.

750 HP

--

$17k

$16k

1000 HP

$20.5k

$19k

$17k

1500 HP

$24k

$21.5k

--

  • Anecdotal Information/Quotable:

Mid-Tier Driller: “Rates were at first down 20% then it started at 5% more and then it was like we’d really like to see 25%, so it’s been all over the map. Some are just stopping. About 10% to 15% are just stopping work all together; evidently they are in pain. Last two and a half weeks nothing looks good.”

  • Rig Rates Continue to Fall

[See Question 5 on Statistical Review]

All respondents said that rig day rates had dropped QTQ by 23% on average due to lower oil prices. Rig rates are expected to stay under pressure if oil prices do not go back up. One respondent said that they are trying to find work with lower rig rates to keep going.

  • Anecdotal Information/Quotable:

Mid-Tier Operator: “The rigs that are coming out of contracts are not getting renewed because of capital cuts. There have been some pretty good rig rate reductions; last month it was 20%, this month it is 40%.”

  • 2015 Demand Remains Weak

[See Question 6 on Statistical Review]

All respondents said that the situation in the Marcellus Shale area is bleak, with no relief in sight. Contractors are laying-off employees, laying down rigs, and renegotiating contracts with operators. Operators are calling for additional discounts on rigs and are shutting down some of their operations.

  • Anecdotal Information/Quotable:

Top-Tier Driller: For 2015? We are on suicide watch.”

  • Penalties on Contracts Hard to Claim

[See Question 7 on Statistical Review]

Respondents said that even if they had a penalty clause in the contract, that collecting it might prove difficult. Two respondents said that operators would rather pay the penalty than continue with the drilling because it was cheaper to get out than stay in. Two respondents said that there is typically an 80% penalty for cancelling contracts, but that while it has not happened to them, they have heard that others have had operators walk away even from the penalty.

Survey Demographics

Hart Energy researchers completed interviews with eight industry participants in the land drilling segment in the Marcellus/Utica region. Participants included one oil and gas operators and seven managers with drilling companies. Interviews were conducted during early February 2015.

End Survey Findings

Part II. – Statistical Review

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 1Q15 compared to 4Q14?

Shrink: 8

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

Excessive 8

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)

Size

AC Power

SCR/Diesel

Conv. Mech.

750 HP

--

$17k

$16k

1000 HP

$20.5k

$19k

$17k

1500 HP

$24k

$21.5k

--

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

Down (15%) 1

Down (20% to 25%) 5

Down (30%) 2

Average Down 23%

6. In 2015, what are your expectations for work volumes if the oil prices continue to be depressed?

Laying off staff, will begin reducing labor rates 2

Drilling, rig count, rates to drop further 5

Getting calls for cheaper rigs, so re-strategizing 1

7. Are rig contracts getting cancelled in today's market environment? What kind of penalties do operators pay to cancel a contract?

Contracts cancelled, hard to press penalties on customers: 2

Contracts cancelled, wells being shut-in, not honoring contracts: 2

Contracts cancelled, penalty of 80% or a certain number of days: 2

Honoring contracts but stopping drilling, cheaper than continuing: 2