Oversupplied: Drillers Face Distress

Synopsis

Want a better understanding of the distress drilling contractors face in the Eagle Ford?

For the first time a contractor offered a 1,500 HP Tier I rig on a six-month contract for below $15,000 per day—a price that would not have been enough to employ a Tier III 1,000 HP mechanical rig one year ago.

The contractor didn’t win the bid.

As in other markets, it is becoming apparent that Eagle Ford operators are finding very tough economics and in some cases wouldn’t drill even if rig price went to zero.

Otherwise, there is very little change in demand for rigs in an oversupplied market. The demand that exists is at very low levels as Eagle Ford rig count continues to edge down, creating fierce competition among contractors in the spot market.

Contractors participating in Hart Energy’s Heard in the Field survey are citing regional land rig utilization of 38%.

The average of rig rates for 1,500 HP Tier I rigs has now fallen to $17,200 per day, including rigs on existing contracts. Pricing drops, and often the rig stacks out, once those contracts expire.

Watch for the next Eagle Ford drilling update in March 2016.

Part I. – Survey Findings

Among Survey Participants:

• Rig Demand Limps To Year’s End
  [See Question 1 on Statistical Review]
  ​Four of the seven respondents said that rig demand had held steady, but remained soft over the last three months, while three said that it had weakened further. One of the respondents that said it had grown weaker said contracts were ending without new demand to fill the need for land drilling rigs.
  • Top-Tier Operator: “We don't see anything in the short term turning around. It’s hopeful that sometime, maybe late second quarter 2016 to third quarter 2016, we will start doing something again or at least getting interested. It is so dependent on oil prices that I'm sure a lot of people would change their tune if the oil price jumped to $70 a barrel next month. The domestic production is going to start seeing a significant hit because of cuts in spending from drilling.”

• Excessive Rig Inventory
  [See Question 2 on Statistical Review]
  ​All seven respondents said that rig inventory in the Eagle Ford shale area continues to be excessive, especially as demand continues to falter.
  • Top-Tier Operator: “There are so many rigs that are stacked. There are less than half in use now.”

• Rig Utilization Estimated At 38%
  [See Question 3 on Statistical Review]
  ​Respondents estimated that rig utilization is around 38%. Most agreed that utilization would not increase before the end of 2015 and possibly could take until 2017 before it cycled back up significantly.
  • Top-Tier Operator: “We are running at 25% utilization, but the area is probably at a quarter to a third of what it was last year.”

• 1,000-HP, 1,500-HP Rig Day Rates In Teens
  [See Question 4 on Statistical Review]
  ​Day rates in the Eagle Ford area for a 1,500 HP A/C rig average between $15,500 to $19,000. However, with a six-month contract rig rates on a 1,500 HP A/C was mentioned as low as $14,800. Rig rate averages given by survey participants can be seen in Table I below and have declined somewhat since the August report.
  • Top-Tier Operator: “We are trying to survive and stay running. The majority of the rig rates have come down considerably. This year we have had contracts on all of our rigs so we have not been able to enjoy a lot of that.”

• Rig Rates Not Projected To Drop Further
  [See Question 5 on Statistical Review]
  ​Operators and contracts said that rig rates could not drop any further as margins have been squeezed thin, but rig rates have continued to fall throughout 2015.
  • Mid-Tier Operator: “Demand has gotten worse and contractors are hurting bad. Operators are taking advantage of lower rates, but only so much of that type of work is available and the competition is very fierce for that work.”

• No Recent Contract Cancellations
  [See Question 6 on Statistical Review]
  ​Contract cancellations that clouded the first part of the downturn are happening less and less. Some operators have renegotiated terms, but all seven respondents said they are not seeing any more cancellations.
  • Mid-Tier Operator: “We are not issuing any contracts right now. Instead we are working month to month and well to well.”

• Short-Term Work Abounds
  [See Question 7 on Statistical Review]
  ​All seven respondents said that operators and contractors are not signing long-term contracts, but instead are working rigs on a well-to-well, multi-well or multi-month basis only.
  • Mid-Tier Operator: “We are not signing any contracts and projections for next year have been grim.”

End Survey Findings

Survey Demographics

H A R T E N E R G Y researchers completed interviews with seven industry participants in the land drilling segment in the Eagle Ford area. Participants included five oil and gas operators and two managers with drilling companies. Interviews were conducted in late November 2015.

Part II. – Statistical Review

U.S. Land Drilling

[Eagle Ford]

Total Respondents = 7

[Oil and gas operators = 5, Drilling companies = 2]

1. Do you expect demand for drilling rigs to grow, remain the same, or shrink in fourth-quarter 2015 compared to third quarter?

2. Would you characterize the supply of rigs in your area as excessive, sufficient, or insufficient to meet fourth quarter 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