Synopsis

Following sharp reductions in Eagle Ford rig count over the last 90 days, service providers indicate the drilling market finally may be leveling.

Operators continue to drill, though at a very low level, on the basis of bargain basement service costs. However, a majority of survey participants indicate the region needs $50 oil before activity improves.

Some operators, who hedged into 2017, are continuing forward with drilling programs while they take advantage of low service costs. However, much of that activity is focused on drilling with less focus on completing wells.

While activity has flattened, rig rates continue to deflate gradually, with the average rate moving down about $500 per day at the low end and $2,000 a day at the high end as existing long-term contracts expire.

Leading edge rates for the benchmark 1,500 horsepower Tier I AC-VFD unit are close to $15,000 with some contractors offering lower pricing if the operator will sign a one-year, or longer, contract.

However, few operators are willing to commit to longer term contracts in the current market. Most operators are doing only what is necessary and awaiting an improvement in economic condition.

Contractors contend pricing for rigs is as low as it can go and expect little change in the next 90 days.

Watch for the next Heard In The Field report on the Eagle Ford drilling market in June 2016.

Part I. – Survey Findings

Among Survey Participants:

  • Demand Diminished, But Not Evaporated
    [See Question 1 on Statistical Review]
    ​Respondents are operating at greatly diminished demand compared to a year ago. However, demand has stabilized when comparing first-quarter 2016 to the fourth quarter of 2015. One E&P respondent has filed bankruptcy protection under Chapter 11, but expects to drill more wells by year’s end.
    • Mid-Tier Drilling Manager: “We are operating at a diminished capacity—about 25% to 30%—of where we were a year ago. I anticipate by reading the tea leaves that things could improve by fourth-quarter, but I don't see that happening until oil prices move up.”
  • Oil Prices Need To Increase To Minimum $40/barrel
    [See Question 2 on Statistical Review]
    ​Four respondents believed demand would pick up with oil priced at $40 per barrel. However, responses ranged from $40 to $60 in terms of what price would help demand increase in the Eagle Ford for an average about $50 among all respondents.
    • Mid-Tier Operator: “Internally, our general consensus is $55 per barrel. That price will cause us to get back to a drilling and completion mode. Our leases are in good shape. They are HBP or held by primary terms, so we could wait as long as we needed to with no crunch to cover that. Low rig costs have kept us drilling our Eagle Ford wells.”
  • Average ~$3 Gas Price Needed For Rig Demand To Improve
    [See Question 3 on Statistical Review]
    ​Four respondents said their plans in the Eagle Ford do not hinge on the natural gas price. However, four gave a range from a low of $2.25 to a high of $4 for an average $3.10 among the four.
    • Mid-Tier Operator: “Gas would have to be in the $4 target range for what we need. That would cause us to come to life instead of just treading water.”
  • Day Rates Lower For High Horsepower Rigs
    [See Question 4 on Statistical Review]
    ​Day rates in the Eagle Ford for a 1500 horsepower (hp) A/C rig ranged between $15,000 to $17,000, down from a range of $15,500 to $19,000 in the December report. Current rig rate averages given by survey participants can be seen in Table I below.
    • Mid-Tier Drilling Operator: “We went out and recently got some new pricing at $15,000 for a 1500 hp rig and it could probably have been lower, but we weren't going to sign for a year or two.”

Table I – Average Day Rates For Eagle Ford Rigs

Size

AC Power

Diesel/SCR

Mechanical

1000 hp

$14,500

$14,000

$10,000

1500 hp

$15,800

$14,900

[Rates shown are an average ‘per day’ rate among all respondents in the category.]

  • Rates Stuck At Rock Bottom
    [See Question 5 on Statistical Review]
    ​Rig rates are as low as they can go according to all respondents. None of the eight respondents believed that rates would go lower in the next three months. For one operator, the low rig rates were an incentive to drill, but oil prices will still keep them from completing.
    • Mid-Tier Operator: “We were lucky or smart—I don't know which - but our equity backers really wanted us to do some hedging so we hedged till the end of 2017. We were fortunate and now we are operating at 100% capacity because of the low rig rates we are realizing.”
  • Eagle Ford Activity A Mixed Bag
    [See Question 6 on Statistical Review]
    ​Although most of the respondents said that activity in the Eagle Ford has been relatively quiet due to lower oil prices, one hedged operator is working at 100% capacity, another at 50% capacity, and two at 25% capacity. One believes work will pick up once they are finished with their Chapter 11 procedure.
    • Mid-Tier Operator: “No one is very active right now. It seems that we've continued to drill into and through bankruptcy with one rig running, but we are a small company.”
  • No Mass Exit From Eagle Ford
    [See Question 7 on Statistical Review]
    ​Most of the respondents said that they are not hearing about any companies leaving the area as most companies are hunkering down to weather the storm.
    • Mid-Tier Drilling Manager: “There are going to be people who shut-in, sell out or quit because there's definitely not enough work to sustain everybody.”
  • Not A Lot Of Business Closures Or Bankruptcies—Yet
    [See Question 8 on Statistical Review]
    ​The majority of respondents said that they do not know of any companies going bankrupt or closing their businesses yet, but several suspect there will be some of that activity to come and one thought a small, but unnamed driller may have shut down.
    • Mid-Tier Drilling Manager: “I've not heard of anyone leaving or closing shop in the Eagle Ford, but I don't really pay attention because it doesn't affect me.”

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 Eagle Ford shale area. Participants included five oil and gas operators and three managers with drilling companies. Interviews were conducted in late February 2016.

Part II. – Statistical Review

U.S. Land Drilling

[Eagle Ford]

Total Respondents = 8

[Oil and gas operators = 5, Drilling companies = 3]

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?

Remain the same:

8


2. What would oil prices have to be for demand for drilling rigs to improve?

$40:

4

$45:

1

$50:

1

$55:

1

$60:

1

Average:

~$50


3. What would natural gas prices have to be for demand for drilling rigs to improve?

$2.25:

1

$3.50:

2

$4:

1

Don’t know:

4

Average:

$3.10


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?

Size

AC Power

Diesel/SCR

Mechanical

1000 hp

$14,500

$14,000

$10,000

1500 hp

$15,800

$14,900

[Rates shown are an average ‘per day’ rate among all respondents in the category.]


5. Do you expect rig day rates to increase, remain the same or decrease over the next three months? By what percent?

Flat (0%):

8

Average

Flat


6. Which drilling companies are the most active in your area during the downturn?

Activity slowed, most in a holding pattern:

8


7. Are there any drillers that have left your area?

None mentioned:

8


8. Are there any drillers that have gone out of business in your area?

None mentioned:

7

Small unnamed drillers:

1


End Statistical Survey