Rocky Mountain Drillers Look For Opportunity Elsewhere

Synopsis

Stability is a good thing in this market even if it is at very low levels for land drillers in the greater Rocky Mountain market (excluding the Bakken Shale).

Respondents to the current Hart Energy survey pegged regional utilization at 30% for drilling rigs. Few contractors expect to see any improvement before mid-year 2016 while other contractors anticipate it will be 2017 before recovery begins.

Rig rates have held up a little better than other domestic markets, but are down from the mid-$20,000 range at peak to mid-teens currently. The benchmark 1,500 horsepower AC-VFD Tier I average $18,000, which includes some rigs still on long-term contracts.

Contractors are mixed on pricing with a few saying it can’t go any lower. Others expect price deflation to continue into the first quarter of 2016 because of weak demand.

Some contractors are seeking revenue for smaller rigs by taking occasional jobs in the mining industry. Contractors note operators have some capital available for 2016, but suspect it will be directed to lease acquisition rather than drilling.

Although contractors remain pessimistic for 2016, several expect full recovery in the regional drilling market in 2018.

Watch for the next greater Rockies drilling report in July 2016.

Part I. – Survey Findings

Among Survey Participants:

• Rig Demand Low, But Stable
  [See Question 1 on Statistical Review]
  ​Seven of the eight respondents said that demand in the first quarter of 2016 is weak, but stable and has not weakened further in the last three months. However, one respondent said that 2016 was already weaker than 2015.
  • Mid-Tier Drilling Manager: “We got through the last year okay. I have one rig out of 10 working and I was able to keep five to six rigs last year. There is a lot of pessimism right now. The one rig is drilling for natural gas because price has rebounded a little bit. I think it is at $2.50, which is good these days. That rig will keep running as long as it stays over $2.”

• Excessive Rig Inventory
  [See Question 2 on Statistical Review]
  ​All eight respondents said that rig inventory in the other Rockies area continues to be excessive, especially as demand continues to be weak.
  • Mid-Tier Drilling Manager: “We have one rig working, one that we are starting up for a shallow well, but rigs are stacking every day. We have 11 rigs stacked.”

• Rig Utilization Estimated At 30%
  [See Question 3 on Statistical Review]
  ​Respondents estimated that rig utilization is around 30%. Two respondents do not expect any uptick in activity until at least mid-year.
  • Mid-Tier Drilling Manager: “I think 2016 is going to be a disaster for drilling contractors unless something unforeseen happens to prop up the price of crude. I think 2017 will see it pick up and it should be pretty good in 2017-18.”

• Day Rates In The Teens For High Horsepower Rigs
  [See Question 4 on Statistical Review]
  ​Day rates in the Greater Rockies for a 1500 HP AC-VFD rig average between $15,000 and $22,000. Rig rate averages given by survey participants are listed in Table I below.
  • Mid-Tier Driller: “These prices seem to be a sweet spot, but I think more pressure downward on prices is coming because of the pessimism. We have to do what we have to do. We have bid on other kinds of work, such as non-oilfield—like mining and soda ash mining. Smaller independents have called wanting to know where I'm at on rates and I think first quarter will be a disaster. A lot of operators that we drilled for in 2014 and years before did nothing last year. They didn't drill one well. We are kind of hoping they are going to have to keep federal leases this year. We drill on a lot of federal lands, which have all sorts of stipulations that if you are not improving your field they can take your leases.

• Rig Rates Unsteady
  [See Question 5 on Statistical Review]
  ​All eight respondents said that it is possible for rates to come down lower this year as 2016 is expected to be challenging. However, rates have gone from the mid-$20,000 to the mid-teens for 1500 HP rigs and respondents said there is little room for them to go down any further.
  • Mid-Tier Drill Manager: “There's money out there, but it may get spent on picking up leases. I don't know if they will spend to drill. It would be pretty courageous to drill wells right now and not complete them. That is worse than putting money in the bank for zero interest.”

• No Recent Contract Cancellations
  [See Question 6 on Statistical Review]
  ​All eight respondents said they are not hearing of any contracts getting cancelled. However, most said that they are also not seeing much in the way of contracts.
  • Mid-Tier Operator: “We have some contractors that have been willing to renegotiate rates and some who haven't, but we have no new contracts.”

• Most Work Is Well-To-Well
  [See Question 7 on Statistical Review]
  ​All eight respondents said that there were little to no long-term contracts and most work is operating month-to-month or well-to-well agreements.
  • Mid-Tier Operator: “Contract work is month-to-month. Rates could easily come down some more in 2016 and most likely will. There are a few jobs out there, but not many.”

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 Rocky Mountain region outside of the Bakken Shale play. Participants included four oil and gas operators and four managers with drilling companies. Interviews were conducted in January 2016.

Part II. – Statistical Review

U.S. Land Drilling

[Other Rockies]

Total Respondents = 8

[Oil and gas operators = 4, Drilling companies = 4]

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 2016 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