Permian Basin Rig Pricing Bottoms, But Road To Recovery Still Far

Synopsis

The decline in demand for Permian Basin drilling services, which was dropping precipitously, has either bottomed or is close to bottoming, according to Hart Energy survey respondents. Indeed, service providers are reporting that they are picking up isolated new jobs for drilling rigs, largely on the basis of depressed pricing. Contractors in the survey report average rig utilization below 40% in the Permian Basin. Pricing for the benchmark 1,500 horsepower (HP) Tier I rig ranged from $17,500 to $23,000, but averaged below $20,000. Contracts cover the spectrum from terms that were renegotiated in the downturn, to cancellations and buy outs, to some surviving original three-year term agreements, to well-to-well, which is a slight majority of working arrangements currently. Of note, service providers say rig pricing has bottomed, though anticipation of a price recovery now stretches out to mid-2016 on the basis of too many rigs, too much oil, and low commodity prices. Watch for the next Permian Basin drilling report in September 2015.

Part I. – Survey Findings

Among Survey Participants:

• Rig Demand Stabilizes In Permian
  [See Question 1 on Statistical Review]
  ​Seven of the eight respondents said that demand for drilling rigs in the Permian Basin had stabilized. One said that demand had picked up as day rates had dropped enough to cause an uptick. Four of the respondents said they believed the downside in the Permian had bottomed out, while two said if not a bottom, it was pretty close.
  • Mid-Tier Driller: “We just sent another rig out. It's looking pretty good. The major [drillers] are not picking up, but they don't want to adjust their pricing. We've adjusted ours and our rigs are working.”

• Excessive Rig Inventory
  [See Question 2 on Statistical Review]
  Although some respondents believed that the downturn in the Permian Basin might be at the bottom, all believed that there still is an excessive amount of rig inventory backlogged as well as an oversupply of oil that still needs to be addressed before demand would return to more normal levels.

• Utilization Hovers Around 37%
  [See Question 3 on Statistical Review]
  Respondents gave varying responses to the utilization rates, from as low as 20% to as high as 45%, however the average of the responses was 37%.

• Rig Day Rate Averages
  [See Question 4 on Statistical Review]
  ​The day rates in the Permian Basin area for a 1500 HP A/C rig varied between as low as $17,500 to $23,000. Rig rate averages given by survey participants can be seen in Table I below.
  • Mid-Tier Operator: “Rates have stabilized 20% to 25% lower year-to-year. The drop in rates was a little more isolated to drilling and ancillary services like cementing and well logging than other areas.”

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

• Rig Rates Flat Quarter-To-Quarter
  [See Question 5 on Statistical Review]
  ​After a falling consecutively from January until May, rig rates have stabilized in the Permian Basin area for all respondents. However, respondents said that it would take until mid to end of next year for them to come back with any strength.
  • Mid-Tier Driller: “It has not gotten worse out here since we last spoke in March, but it has stayed pretty bad.”

• Contracts Holding in Permian Basin
  [See Question 6 on Statistical Review]
  ​All respondents said that contracts are holding and they have heard of no recent cancellations between operators and drilling companies. However, in the first six months of the year contracts have been renegotiated and some contracts have been paid off.
  • Mid-Tier Driller: “Contracts are all over the place—there are subsidized contracts, contracts being paid off, contracts being renegotiated, and no contracts.”

• Contracts Are A Mix Of Short And Long Term
  [See Question 7 on Statistical Review]
  ​Three of the eight respondents said that contracts are multi-year and have not changed quarter-to-quarter or year-to-year, while two said most contracts are well-to-well and have been since last year and two said that operators function with both multi-year and well-to-well depending on the relationship. One respondent was unsure about the prevailing contractual relationship in the market as they have been waiting for prices to go back up to begin drilling.
  • Mid-Tier Operator: “I would be speculating. We have never engaged in long-term contracts. Six months is it for us. We have toyed with a newbuild long-term contract last year, and were thinking about acquiring it, but then that all went away.”

End Survey Findings

Survey Demographics

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

Part II. – Statistical Review

U. S. Land Drilling

[Permian Basin]

Total Respondents = 8

[Oil & Gas Operators = 4, 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?
Grow: 1
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 8

3. In percentage terms, what is your estimate of drilling rig utilization in your area?
20% 1
30% 1
40% 3
45% 2
Don’t know 1
Average Utilization 37%

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 three months?
Flat 8
Average 0%

6. Are any contracts being cancelled and if so, what is the penalty?
No cancellations 8

7. How would you characterize contractual market share in your area of operations between multi-year, multi-month, or well-to-well?
Well-to-Well: 2
Multi-year: 3
Both well-to-well and multi-year: 2
Not sure: 1

End Statistical Survey