Midcontinent Needs $50 Oil Before Drilling Revives

Synopsis

As regional rig utilization in the Midcontinent falls to 26%, contractors are stacking drilling equipment, laying off additional workers and hunkering down for another challenging year in 2016.

Attitudes are approaching capitulation among service providers who have little expectation that the market will improve anytime soon.

Rig rates have fallen so low that contractors are now insisting they will stack equipment rather than work below cash costs. They may have little choice because operators aren’t hiring many drilling units, regardless of price. And when they do, it is on a well-to-well basis.

The takeaway from the current Hart Energy drilling survey is that the Midcontinent needs $50 oil sustained for activity to revive.

Watch for the next Midcontinent drilling report in April 2016.

Part I. – Survey Findings

Among Survey Participants:

• Demand Weak In Midcontinent
  [See Question 1 on Statistical Review]
  ​All respondents said that demand was weak, but had remained the same first-quarter 2016 quarter-to-quarter. Three of the seven said that there are no plans to do any work this year. Companies are shedding costs and workers to accommodate the weak market.
  • Mid-Tier Operator: “We are shedding people and costs. We are definitely going to make sure that we don't bid jobs below our cost structure. Some products are having a hard time so we have had to shut them down. The ones we can make some money in are what we are going forward with, putting out rigs and doing fairly well.”

• Excessive Rig Inventory
  [See Question 2 on Statistical Review]
  ​The Midcontinent is flooded with excessive inventory as most respondents have a small fraction of their rigs working and most are stacked.
  • Mid-Tier Operator: “We are not doing anything. There are deals that come along that make sense and we have some prospects on hold, but until prices get above $50 per barrel—we don't see anything that makes a lot of sense drilling.”

• Rig Utilization Estimated At 26%
  [See Question 3 on Statistical Review]
  ​Respondents estimated that rig utilization is around 26% in early 2016. Two respondents believed this was as low as demand and utilization would go, while three said they don’t anticipate that there will be a pick up in 2016.
  • Top-Tier Operator: “Compared to the peak, 25% would be fair to say where we are right now. For the foreseeable future, maintaining 25% is the goal with only a couple of drilling rigs active.”

• Day Rates In The Teens For High Horsepower Rigs
  [See Question 4 on Statistical Review]
  ​Day rates in the Midcontinent region range between $15,000 to $18,000 for the benchmark 1,500 hp Tier I AC-VFD unit and average $16,500.
  • Mid-Tier Drilling Manager: “We have cut wages and costs and our margins have dropped, but there is a break-even point. A year ago when rig rates were higher our costs were too, but cost have come down. There is still some opportunities for innovative people.”

• Rig Rates Stable
  [See Question 5 on Statistical Review]
  ​The lowest reported rig rate for a 1,500 hp AC-VFD rig was $15,000. Respondents said that the rates could not go lower because of the cost associated with running the equipment.
  • Mid-Tier Drilling Manager: “We have just come to a stop and quite frankly we are looking at the whole year as nothing. We are just going to continue to have everything laid down until the market improves for our piece of the business. It has got to improve and stay that way for quite a period of time. There is so much idle equipment out there.”

• No Recent Contract Cancellations
  [See Question 6 on Statistical Review]
  There have been no recent contract cancellations like there had been in early 2015 according to all respondents.
  • Mid-Tier Drilling Manager: “We are not seeing any cancellations. We are not seeing any drilling either.”

• Most Work Is Well-To-Well And Month-To-Month
  [See Question 7 on Statistical Review]
  ​Five respondents said that work has been a combination of well to well and month to month, while three said they are only seeing well to well negotiations in the Midcontinent area.
  • Mid-Tier Operator: “There is a huge amount of pessimism that is out there, so I have to believe we are not close to the bottom. However, we won’t see anyone taking on a long-term contract until prices have been up for a while.”

End Survey Findings

Survey Demographics

H A R T E N E R G Y researchers completed interviews with seven industry participants in the land drilling segment in the Midcontinent region. Participants included five oil and gas operators and two managers with drilling companies. Interviews were conducted in January 2016.

Part II. – Statistical Review

U.S. Land Drilling

[Midcontinent]

Total Respondents = 7

[Oil and gas operators = 5, Drilling companies = 2]

1. Do you expect demand for drilling rigs to grow, remain the same, or shrink in first-quarter 2016 compared to the fourth quarter of 2015?

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

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 percentage?

6. Are any contracts being cancelled and if so, what is the penalty?

7. How would you describe contractual market share in your area of operations?

End Statistical Survey