Some Uneasy Signs And Times For Producers

Synopsis

Operators are growing pessimistic on the Bakken market in the wake of lower commodity prices, according to drilling contractors surveyed via Hart Energy’s Heard in the Field market research program. The downturn in sentiment is in contrast to perceptions that the market had stabilized previously. Contractors pegged rig utilization at approximately two thirds, though some respondents noted idled mechanical rigs might never return to the market. Pricing has stabilized, but remains below $20,000 per day for the benchmark 1,500 horsepower Tier I AC rig. Newbuild Tier I rigs are being priced at $20,500, substantially below the range of $27,000 to $31,000 before oil prices began falling in the summer of 2014. Several rigs are still working on previous term contracts though most new work occurs on a well-to-well basis. No respondents noted signing term contracts this quarter. Active rig count in the Bakken is down about 60% versus levels in the last quarter of 2014. Watch for the next Bakken drilling report in November 2015.

Part I. – Survey Findings

Among Survey Participants:

• Rig Demand Generally Flat QTQ

[See Question 1 on Statistical Review]

Six respondents said that demand had not increased versus last quarter, but one said demand has decreased. With the oil price taking another step down, respondents’ sentiments have turned a little more pessimistic over the past few weeks.

Mid-sized Driller: “Our customers are just plain negative on the market right now.”

• 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, same as in other areas. In addition, some drillers acknowledged that some idled rigs are likely not to return to service when the market turns up.

Mid-Tier Driller: “Mechanical rigs are done. There are some drillers still running them only because they have unique clientele.”

• Bakken Utilization Estimated at 66%

[See Question 3 on Statistical Review]

Some respondents said about a third of rigs in the Bakken area were stacked. Rig utilization is estimated at approximately 66% with respondents’ answers ranging between 60% and 70%.

Mid-Tier Driller: “There are still a lot of stacked rigs here, especially some of the older ones.”

• Rig Day Rates Vary among Types

[See Question 4 on Statistical Review]

The day rates in the area for a 1500 HP rig varied between as low as $17k for a Mechanical type to $20.5k for a new AC rig. Rig rate averages given by survey participants can be seen in Table I below:

Table I – Average Day Rates for Certain Rigs Sizes

in the Bakken

[Rates shown are an average ‘per day’ rate among all respondents in the category.](k = thousand)

• Rig Rates Expected to Remain Flat to Down Slightly QTQ

[See Question 5 on Statistical Review]

Six respondents expect rig rates to remain flat QTQ, but one small driller expects another 5% decrease in rates in 3Q15 compared to 2Q15.

Mid-sized Driller: ”We don’t see rates going back up anytime this year. They have leveled out, but we don’t see them going back up until oil hits $75.”

• 3Q Contracts Holding in Bakken

[See Question 6 on Statistical Review]

All respondents agreed that most contract cancellations or renegotiations took place in 1Q15 and 2Q15 so any rigs on term contracts now are likely to remain intact for the foreseeable future.

• Well-to-Well Contracts Common

[See Question 7 on Statistical Review]

Five of the seven respondents said that well-to-well contracts are common in the Bakken area now. However, two respondents continue to work rigs on term contracts. Other said they had not signed any new contracts recently or renegotiated any either.

Mid-Tier Operator: “We may adjust our capital spending by spending more in the Bakken and less in the Piceance so we are not tying up rigs long-term right now anywhere.”

Survey Demographics

H A R T E N E R G Y researchers completed interviews with seven industry participants in the land drilling segment of the Bakken shale. Participants included one oil and gas operator and six managers with drilling companies. Interviews were conducted during early August 2015.

Part II. – Statistical Review

U.S. Land Drilling

[Bakken Shale]

Total Respondents = 7

[Oil & Gas Operator = 1, Drilling Companies = 6]

1. Do you expect demand for drilling rigs to grow, remain the same, or shrink in 3Q15 compared to 2Q15?

Decrease: 1

Remain the Same: 6

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?

70% 4
65% 1

60% 2

Average Utilization 66%

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 3 months?

Flat 0% 6

Decrease 5%: 1

Average Flat to down slightly

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?
Well-to-well 3

Mix of term contracts and well-to-well 2

No contract negotiations or renegotiations recently 2