Midcontinent Drillers Brace For Another Price Drop

Synopsis

Drilling contractors are concerned that a stable demand market—albeit at very low utilization—might face another leg down in the wake of retrenching oil prices. Regional drilling rig utilization was pegged in the low 40% range among Midcontinent contractors and not expected to improve. Although second-quarter 2015 rig pricing was stable within a range of $17,000 to $18,500 for the benchmark 1,500 HP AC Tier I rig, fears are growing among contractors that rates may have more downside in the wake of lower commodity prices. Most work remains well-to-well though some operators are seeking to lock in low rates via term contracts but are not finding much enthusiasm among contractors for the arrangement. Participants in the Hart Energy survey expected pricing to remain flat in the third quarter, but are concerned over the recent decline in oil prices and its impact on Midcontinent drilling. Watch for the next Midcontinent drilling update in October 2015.

Part I. – Survey Findings

Among Survey Participants:

• Rig Demand Steady Quarter-To-Quarter
  [See Question 1 on Statistical Review]
  ​All six respondents said that demand had not increased vs. last quarter, but it also had not decreased. Respondents were concerned lower oil prices and the Iran nuclear deal might upset the newfound stability in the Midcontinent area.
  • Mid-Tier Driller: “I'm not so sure things have stabilized. With the Iran deal there is a perception that they could flood the market with one million barrels a day. Perception is reality because oil prices have dropped since.”

• Excessive Rig Inventory
  [See Question 2 on Statistical Review]
  ​All respondents agreed that there is an excessive amount of land drilling rigs in the Midcontinent area. Respondents believe that it is possible that more rigs might be laid down if oil prices stay down.
  • Mid-Tier Driller: “We have been steady for the last four or five months, but it's not good if you think that we had seven rigs and are now running just one.”

• Low Rig Utilization In The Midcontinent
  [See Question 3 on Statistical Review]
  ​Respondents said that rig utilization is somewhere between 35% and 50% in the Midcontinent. Most agreed that utilization would continue to hover in the 42% range through the third quarter.
  • Mid-Tier Driller: “We spoke with some guys who have 13 rigs and now have one running. Another company has four and none running. Another has seven rigs and four running. We are at 35% utilization right now.”

• Rig Day Rates Stable, But Low
  [See Question 4 on Statistical Review]
  ​The day rates in the Midcontinent area for a 1500 HP AC rig varied between as low as $17,000 to $18,500. Rig rate averages given by survey participants can be seen in Table I below.
  • Mid-Tier Operator: “We're bumping along the bottom. I'm sitting in a customer’s office right now about to sign a deal so we are still selling but we have had to drop our prices like everyone else.”

• Rig Rates Flat Quarter-To-Quarter
  [See Question 5 on Statistical Review]
  ​Respondents said that rates are flat quarter-to-quarter. Respondents said that rates have dropped 20% to 25% quarter-to-quarter.
  • Mid-Tier Driller: “It will be interesting to see what happens with Iran, but I believe oil prices are going to drop because Iran has nothing but a surplus and they are looking to get rid of it. Rates could drop further.”

• Contracts Holding In Midcontinent Area
  [See Question 6 on Statistical Review]
  Most of the respondents said that they have not heard of contracts being broken or paid off by operators. This was a change from second-quarter 2015, when most of the respondents had said they were hearing of contracts being paid off or cancelled.
  • Mid-Tier Operator: “We are not signing any contracts this year so I don't know. We are only doing what we have to do.”

• Most Contract Term Lengths Vary
  [See Question 7 on Statistical Review]
  ​Respondents said that contracts run from well-to-well to long-term contracts. However, two said they are not signing any contracts. One respondent said he is only doing well-to-well business. Three said they were signing multi-year contracts.
  • Mid-Tier Driller: “I just signed a long term contract and built-in a variability clause. It shows the operator I'm willing to work in good times and bad. There are companies that want long-term commitments and some who don't want the risk, but I'm unwilling to sign a cheap rate to a long time. That's upside down from where we were. We used to offer a cheaper rate for the longer-term but starting from a higher number.”

End Survey Findings

Survey Demographics

H A R T E N E R G Y researchers completed interviews with six industry participants in the land drilling segment in the Midcontinent area. Participants included three oil and gas operators and three managers with drilling companies. Interviews were conducted during late July 2015.

Part II. – Statistical Review

U.S. Land Drilling

[Midcontinent]

Total Respondents = 6

[Oil & Gas Operators = 3, Drilling Companies = 3]

1. Do you expect demand for drilling rigs to grow, remain the same, or shrink in third-quarter 2015 compared to the second quarter?
Remain the same: 6

2. Would you characterize the supply of rigs in your area as excessive, sufficient, or insufficient to meet third-quarter 2015 demand?
Excessive 6

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 %?

6. Are any contracts being cancelled and if so, what is the penalty?
No: 6

7. How would you describe contractual market share in your area of operations?
Multi-year and monthly: 3
We have not signed any contracts: 2
Only doing well to well: 1

End Statistical Survey