Pricing For Service Rigs Continues To Fall In Bakken

Synopsis

Demand for drilling services in the Bakken Shale is still declining with regional fleet utilization reported at less than 45%. Drilling contractors anticipate another 10% drop in rig pricing on top of the 10% decline witnessed in the second quarter of 2015. Spot market rig rates for benchmark 1,500 horsepower AC Tier I units have dropped below $20,000 per day in several instances, though contractors pegged the regional average at $20,500 on the basis of legacy contracts. Almost all work is down well-to-well in the Bakken currently versus the previous practice of one- to three-year contracts. Bakken drilling contractors participating in the Hart Energy survey do not believe the backlog of drilled but uncompleted wells has grown outside of typical norms in the industry. Watch for the next Bakken drilling update in August 2015.

Part I. – Survey Findings

Among Survey Participants:

• Rig Demand Mixed
  [See Question 1 on Statistical Review]
  ​Six of the eight respondents said that rigs are still being laid down in the Bakken, while two said that work had stabilized and has been fairly steady in 2Q15 versus 1Q15.
  • Mid-Tier Driller: “We've remained fairly steady with the contracts we have, but work has decreased in the area.”

• Excessive Rig Inventory
  [See Question 2 on Statistical Review]
  ​All respondents agreed that there is an excessive amount of land drilling rigs in the Bakken area and this surplus is not expected to dwindle any time soon. One mid-sized operator said it is unlikely the excess inventory could ever be put to work given the cost cutting and efficiencies that the downturn has forced on companies.
  • Mid-Tier Driller: “We went from seven rigs working down to zero.”

• Utilization in the Bakken is ~46%
  [See Question 2 on Statistical Review]
  ​Respondents agreed that utilization is slightly more than 45% on average. All sources gave utilization estimates ranging from 40% to 50%.
  • Mid-Tier Driller: “The Bakken went from 200 plus rigs to now below 80.”

• No Newbuilds on Order
  [See Question 3a and 3b on Statistical Review]
  ​There are no new rigs being ordered right now in the Bakken, but one respondent said that operators would be seeking to be as cost-efficient as possible going forward and so contractors would be scrutinizing and upgrading rigs in accordance with those needs. However, the same respondent reported there are plenty of rigs to choose from in the Bakken.
  • Mid-Tier Driller: “Even though the rig count has been reduced substantially, we are still seeing rigs laying down.”

• Rig Day Rates Under Pressure
  [See Question 4 on Statistical Review]
  ​Rig rates in the Bakken Shale area for a 1500 HP A/C rig varied between $17,000 to $22,000. Rig rate averages given by survey participants can be seen in Table I below.
  • Mid-Tier Driller: “I would say $21.5k would be high. Most of what I’ve been seeing out there is in the high teens for a day rate.”

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

• Rig Rates Down 10% QTQ
  [See Question 5 on Statistical Review]
  ​Six of the eight respondents said that rig rates had dropped QTQ, with an average decline of 10%. This is a slower decline than what respondents experienced in the 1Q15 report. Two respondents said that rates had not dropped further QTQ even though they had declined YTY.
  • Small, Independent Operator: “The guys I talk to say the projects that they have in front of them can be made to work at $60 to $65/barrel oil prices. We can make as much money as we did at $80 to $85 because we are doing it cheaper and smarter. There is life after lower oil prices.”

• Contracts Holding in Bakken Shale
  [See Question 6 on Statistical Review]
  ​Most of the respondents said that they have not heard of contracts being broken or paid out by operators. Instead, respondents said a mix of responses have occurred with either no change to contracts, a price concession made, or some negotiation around the agreement.
  • Mid-Tier Operator: “In 2009, we heard a lot of operators buying out contracts, but this time we are not seeing that so much.”

• Most Contracts Are Well-to-Well
  [See Question 7 on Statistical Review]
  ​Seven of the eight respondents said there has been a change from long-term (one to three year) contracts being signed in the Bakken to most work being done on a well-to-well basis. One respondent said that he had been on well-to-well for the past three years, so there has been no change for his company.
  • Mid-Tier Operator: “We have had a variety of issues. Some contracts have stayed the same, some have been renegotiated, and some have been cancelled. There are penalties in some and some have clauses that help to work out a cancellation.”

• Most Wells Are Completed
  [See Question 7 on Statistical Review]
  ​Respondents said that most of the wells that are drilled are completed. They may be completed and then production is curtailed right now, but there are not a lot of idle wells in the Bakken area.
  • Mid-Tier Operator: “We continue to complete wells in North Dakota.”

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 Bakken Shale area. Participants included four oil and gas operators and four managers with drilling companies. Interviews were conducted during late May 2015.

Part II. – Statistical Review

U.S. Land Drilling Segment

[Bakken Shale]

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 2Q15 compared to 1Q15?
Remain the Same: 2
Shrink: 8

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?
40-50%: 8
Average: ~46%

4. In your area, do you expect there will be an influx of newbuild rigs during the next six months?
No: 8

5. 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)

6. Do you expect rig day rates to increase, remain the same or decrease over the next three months? By what percent?
Flat 0% 2
Down 10% 4
Down 20% 1
Down 22.5% 1
Average Down 10%

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

8. How would you describe contractual market share in your area of operations between multi-year, multi-month, or well-to-well? How does that differ from a year ago?
Well-to-well, change from 2014 yearly contracts 5
Well-to-well, has always been well-to-well 1
Contracts vary in length 1
No contracts 1

End Statistical Review