There is no rest for weary land contractors as the sector enters the second year of the worst oil and gas downturn since 1986. The Baker Hughes Inc. U.S. rig count is down more than two-thirds from the late 2014 peak, including an astounding 80% collapse in the Bakken, a demoralizing 73% decline in the Marcellus, an accelerating 69% erosion in the Eagle Ford and a sobering 52% drop in the Permian.

Indeed, as this edition of E&P magazine goes to press, the 70-week-long decline in drilling activity has become the second longest in the last quarter century. Should weekly rig count declines continue to the next edition of E&P magazine, this downturn will exceed the 1991-92 event, which at 75 weeks was the longest in a generation. Clearly, contractors are weathering an economic storm of historic proportions.

Although much has been said—and written—about the emerging performance characteristics of modern technology rigs, the reality is that severe downturns impact rigs in every class, as the 500-plus stacked Tier I AC-VFD rigs illustrate.

Hart Energy surveys of drilling contractors across the U.S. find utilization below 40% in all regional markets. February 2016 examples include 26% utilization among Midcontinent drilling contractors, 30% in the greater Rockies (ex Bakken Shale), 36% in the Permian Basin and 38% in the Eagle Ford.

Rig rates have followed. The steep activity decline at the close of 2015 coincided with an astounding 7% average quarterly drop in day rates across all rig classes. Rig rates for the benchmark 1,500-hp AC-VFD Tier I unit averaged less than $18,000 per day across the land market, down 27% from the $24,700 average when rates peaked during the newbuild boom in fourth-quarter 2012.

Those are average rig rates and incorporate higher rates from long-term contracts that have yet to run their course. When those contracts end, the benchmark 1,500-hp unit will enter a brutal spot market where rates are $16,000 and lower—assuming the rig does not stack out. Long-term contracts, which had been the norm under higher commodity prices when operators were scrambling to obtain rigs to convert unconventional acreage into production and reserves, have given way to month-to-month or well-to-well contracts.

“It is going to get cutthroat around here because there are so many rigs stacked and there is not any work,” one mid-tier Permian Basin contractor told Hart Energy surveyors.

Another Midcontinent midtier driller noted the impacts on his business.

“We have just come to a stop, and quite frankly we are looking at the whole year as nothing. We are just going to continue to have everything laid down until the market improves for our piece of the business.”

Reality has settled in for drilling contractors. Few expect activity to pick up in a meaningful way until pricing exceeds $50 on a sustained basis in the Midcontinent and $55 in the Bakken and Eagle Ford shales, according to regional contractors. Meanwhile, operators were belatedly announcing 2016 capital spending plans that called for drops of 25% to 50% over 2015 levels.

The drop in oil prices at the beginning of 2016 extinguished any remaining hope that contractors would see recovery in 2016.

All have cut wages, stacked equipment and pressured suppliers for lower costs. Some contractors have bid equipment at substantial discount only to find no takers since operators cannot make money in the present economic environment even if the rig provided is free. As contractors face diminishing options, many are stacking equipment rather than working below cash operating costs. All contractors are impatiently waiting for 2017.

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