Rig Rates For 1,500 HP Tier I Units Drop Below $20,000

Synopsis—

Part I. – Survey Findings

Leading edge pricing for 1,500 horsepower (hp) Tier I rigs fell below $20,000 per day in the Eagle Ford Shale, down from $24,300 at the end of 2014. Contractors expect rig rates to drop another 20% over the next 90 days as rigs stack out. The Eagle Ford maintained drilling levels longer than other basins, but the downturn arrived in force during the first-quarter 2015. Some operators on long-term contracts are finding it cheaper to stack a rig and pay the original rig rate rather than add new wells. Others are buying out contracts and letting rigs go, or negotiating to extend the term at lower pricing. Watch for the next Eagle Ford land drilling update in June 2015.

Among Survey Participants:

• Rig Demand Falling QTQ
  [See Question 1 on Statistical Review]
  Demand for land drilling rigs weakened in 1Q15 versus 4Q14 as oil prices cause operators to slow down. All respondents said activity was lower now than in January 2015. Rigs drilling horizontally in the Eagle Ford have dropped 52 units to 140 active versus the last quarter, according to Baker Hughes.
  • Mid-Tier Operator: “We are not at the bottom, There is still more pain to come. As the oil price and natural gas price stay low, more people are going to be slowing programs. I really think this is only March and we still have a long way to go.”

• Excessive Rig Inventory
  [See Question 2 on Statistical Review]
  ​All respondents said that there is an excess of rigs in the Eagle Ford market.
  • Mid-Tier Operator: “We have released half of our rigs and reduced our budget by nearly 50%, and with the price of oil going down 50%, we matched the reduction. Our goal is to ride the year out and maintain leases.”

• Newbuild Orders Stall in the Eagle Ford area
  [See Question 3a and 3b on Statistical Review]
  ​None of the respondents had newbuilds on order in the Eagle Ford area nor had they heard of any in the pipeline.
  • Mid-Tier Operator: “Demand is down, supply is up, and price is down, so there are no new rigs being ordered at this time.”

• Rig Day Rates Under Pressure
  [See Question 4 on Statistical Review]
  ​All rates have been discounted from 11% to 30%, according to survey participants, and are likely to lose ground during the next three months. Rig rate averages given by survey participants are listed in Table I below.
  • Mid-Tier Operator: “It’s a good assessment to say that drilling rig day rates are down 20% to 25%, but I think frac contracts have gone down more than that.”

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

• Rig Rates Down 21% QTQ
  [See Question 5 on Statistical Review]
  ​All respondents said that rig day rates had dropped QTQ by 21% on average due to lower oil prices. Rig rates are expected to stay under considerable pressure if oil prices do not rally.
  • Top-Tier Driller: “We are still seeing rigs stacking and prices under pressure.”

• Operators Paying to Terminate Contracts
  ​[See Question 6 on Statistical Review]
  ​Seven of eight respondents said that operators were paying partial or full day rates to get out of drilling contracts in 1Q15.
  • Top-Tier Driller: “They are buying out of the contract or stacking rigs and continuing to pay the day rate. It is cheaper to stack the rig than to drill in some cases.”

• Containing Cost is 2015 Strategy
  [See Question 7 on Statistical Review]
  ​Seven of eight respondents said the strategy for 2015 is to hold workload steady and to control costs. Most believed that even if oil prices came back up it would take a while to get rates back to where they were just one quarter ago.
  • Mid-Tier Driller: “Our strategy is to do whatever we can to get cost down, whether it's a year, or a year and a half that the prices will start coming up because it will probably come up slowly unless some event triggers it. If it does it will be short lived. No one knows.”

• Completions Down Slightly
  [See Question 7 on Statistical Review]
  ​Two of eight respondents said wells drilled in the Eagle Ford are being completed while two said operators were drilling but waiting to complete the wells, hoping oil prices would come back up. Four respondents said they were not sure what the ratio was of wells drilled to wells completed.
  • Mid-Tier Operator: “We are still completing the wells we are drilling, but I’ve heard some are not completing right now. We are not doing that. Our wells are not that old in the Eagle Ford to do a re-frack. We looked at the strategy to drill and not complete, but that ties up capital because we are not getting any profits.”

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 Eagle Ford Shale area. Participants included six oil and gas operators and two managers with drilling companies. Interviews were conducted during March 2015.

Part II. – Statistical Review

U.S. Land Drilling – Eagle Ford

Total Respondents = 8
[Oil & Gas Operators = 6, Drilling Companies = 2]

1. Do you expect demand for drilling rigs to grow, remain the same, or shrink in 1Q15 compared to 4Q14?
Shrink: 8

2. Would you characterize the supply of rigs in your area as excessive, sufficient, or insufficient to meet 2015 demand?
Excessive: 8

3a. In your area, do you expect there will be an influx of newbuild rigs during the next six months?
No: 8

3b. What size and type of rigs do you expect will come into the market?
Not applicable 8

4. What are average 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 3 months?
Down (11%) 1
Down (17.5%) 2
Down (20%) 2
Down (22.5%) 1
Down (27.5%) 1
Down (30%) 1
Average Down 21%

6. Are any contracts being cancelled and if so, what is the penalty?
Yes, paying the full day rate 3
Yes, penalty depends on the agreement 1
Yes, from partial to full day rate penalty 2
Yes, if don’t pay, end up in court 1
No, not hearing companies ending contracts 1

7. What strategies are being put in place to cope with low oil prices?
Control costs 2
Hold steady 5
Day rates will have to go down further 1

8. What are you seeing in terms of the number of wells drilled versus completed?
Wells drilled are being completed 2
Operators are drilling but not completing 2
Don't know 3
Not applicable 1