Operators High Grade Rigs In Niobrara Shale

Synopsis

After declining for the first half of 2015, demand for drilling rigs stabilized at the end of the second quarter in the Denver-Julesburg (D-J) Basin/Niobrara Shale. Job inquiries are up incrementally as operators shop for higher spec rigs at regular rig pricing. Some operators are pushing for extended well contracts at current pricing, suggesting to contractors that rates may be at bottom. Operators are signaling D-J Basin contractors that stronger demand for drilling services is still a 2016 event. Contractors report attrition of lower spec rigs is real and will reduce the size of the region’s working fleet. Average rates for the benchmark 1,500 HP Tier I unit fell below $20,000, but range from $18,500 to $22,000. Watch for the next D-J Basin/Niobrara drilling report in December 2015.

Part I. – Survey Findings

Among Survey Participants:

• No Change In Rig Demand Quarter-To-Quarter
  [See Question 1 on Statistical Review]
  ​All seven respondents said that demand had not increased versus last quarter, but it had not decreased either. Respondents said that if this is not a bottom, it is fairly close to one in the Other Rockies area. However, rig demand is still volatile as it mirrors fluctuations in oil prices.
  • Mid-Tier Operator: “Last week I would have said things are stabilizing and getting better, this week with oil prices lower and the news with Greece, things are looking slow again. If oil prices drop below $50 it could get even worse.”

• Excessive Rig Inventory
  [See Question 2 on Statistical Review]
  ​All respondents agreed that there is an excessive amount of land drilling rigs in the Other Rockies area. Respondents believe that not all of those rigs that were laid down will be picked back up, some will be retired and operators are asking for newer equipment because they have a choice because supply is so readily available.
  • Mid-Tier Driller: “In 2008, the rigs that were running in 2006 and 2007 went down and not all of them came back out. Two of my rigs are retired and not going to be marketed anymore, does that go into the 40% utilization rate or not?“

• Utilization In The Other Rockies Is At 41%
  [See Question 3 on Statistical Review]
  ​Respondents said that rig utilization is somewhere between 40% and 50% in the Rocky Mountain areas outside of the Bakken. Most agreed that utilization would continue to hover in the 41% range through the third quarter.
  • Mid-Tier Driller: “It might even be lower than 40% for the number of runnable rigs. There are some rigs that haven't even touched a well yet.”

• Rig Day Rates Vary Among Types
  [See Question 4 on Statistical Review]
  ​The day rates in the area for a 1500 HP A/C rig varied between $18,000 to $22,000. Rig rate averages given by survey participants can be seen in Table I below.
  • Mid-Tier Driller: “Rates are not at the bottom, if it doesn't get any worse it will stay flat. We are bidding work right now and I have turned down work in which people [competitors] are outbidding me, I am not going to do it for less money than it cost. I saw the lowest rate for an A/C rig at $16,500, but the average $18,500 for a used, non-new A/C rig. A new purpose-build one coming out of the yard can get $20,000.”

• Rig Rates Flat Quarter-To-Quarter
  [See Question 5 on Statistical Review]
  ​Respondents expect rig rates to remain flat quarter-to-quarter after falling by as much as 35% since the beginning of the year.
  • Top-Tier Driller: “All but two of my fleet are AC powered and one reason everyone wants an AC rig is because they can get an AC rig for the price of a mechanical rig. They know AC power is a new rig and new technology and so why pick up an older rig when they can get a new one for the same rate of $18,500?”

• Contracts Holding In Other Rockies 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 re-negotiating our contracts and are very term sensitive. We told our vendors we are not willing to look at this as a very long-term thing. Frankly, they shouldn't be either. However, our vendors think it is going to continue to be a stagnant market for some time and they are interested in getting terms for long-term cash flow because if they thought rates were at the bottom they wouldn’t want a contract.”

• Most Contracts Vary
  [See Question 7 on Statistical Review]
  ​Two of the seven respondents said business has been so slow they have not negotiated a contract in the quarter. Two respondents said they only work on a well-to-well basis and that has not changed since last year. The other three of the seven respondents said that the contract depends on the client and that has not changed since last year.
  • Mid-Tier Operator: “We are not looking for long-term contracts because we are going to see at least a year of volatility and we will be bumping around. I would like to see it bump at $60 because $50 is more challenging. Even better, $70 would make us ramp up fairly quickly.”

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 Other Rocky Mountain areas outside of the Bakken. Participants included three oil and gas operators and four managers with drilling companies. Interviews were conducted during early July 2015.

Part II. – Statistical Review

U.S. Land Drilling

[Other Rocky Areas outside of Bakken]

Total Respondents = 7

[Oil & Gas Operators = 3, Drilling Companies = 4]

1. Do you expect demand for drilling rigs to grow, remain the same, or shrink in third-quarter 2015 compared to second quarter?
Remain the Same: 7

2. Would you characterize the supply of rigs in your area as excessive, sufficient, or insufficient to meet 2015 demand?
Excessive: 7

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?

6. Are any contracts being cancelled and if so, what is the penalty?
No cancellations: 7

7. How would you describe contractual marketshare in your area of operations?
No change, depends on relationship: 3
No change, well-to-well: 2
Have not negotiated a contract recently: 2

End Statistical Survey