It all changed in July. Falling commodity prices upended the apple cart of hope for land contractors that had grown comfortable with anticipation of a modest improvement in demand for drilling services. Sentiment quickly soured among service providers as demand for oilfield services subsequently evaporated. And land rig pricing, which had dropped to levels that contractors argued were cash cost-neutral at the end of June, began weakening again.

Land drillers are once again stacking out rigs that roll off contract, letting valuable crews go and hunkering down for survival mode in a downturn that is proving unexpectedly sticky. Multiyear contracts have become multiwell contracts but mostly have devolved to well-towell or pad-to-pad contracts as operators seek only to meet drilling obligations to hold acreage or focus on the very best reservoir rock.

In the Permian Basin, some contractors began promoting a return to footage contracts. Footage contracts bundle services and expand margin but entail greater financial risk. The contracts had largely disappeared from the market during the high-demand era that characterized the industry after the 2010 recovery.

As for rig pricing, it’s not hard nowadays to find a benchmark Tier I 1,500-hp AC-VFD unit capable of pad drilling for less than $19,000 per day, or more than 30% below peak pricing last year. Considering those rigs make up more than half of the 820 rigs currently turning to the right, it’s a sobering commentary on the state of the land drilling market, which this time last year was moving to add more than 190 newbuild pad-capable rigs to satisfy demand in expanding horizontal tight formation development programs.

Average rig rates peaked for all rig classes about this same time last year at just less than $21,000 per day. At the end of second-quarter 2015, average rates for all rig classes had fallen to $17,200 per day, according to Hart Energy telephone surveys. That figure is even more significant when considering the majority of rigs that had stacked out in the current downturn were lower priced conventional mechanical units and older electric DE-SCR drive rigs. In other words, although operators were high-grading rigs when possible, overall rig pricing was dropping to levels last seen in the 2009 market collapse.

Indeed, at the end of second-quarter 2015, the only markets where rates for the benchmark 1,500-hp AC-VFD unit averaged above $20,000 included Louisiana’s Haynesville Shale with its deep HP/HT drilling and the emerging SCOOP/STACK play in the Anadarko Basin. Rates averaged $20,000 in the Marcellus and Utica shales, although rig count was trending lower for both plays in August.

Elsewhere, spot market rig rates for the benchmark Tier I 1,500-hp AC-VFD unit were less than $19,000 and, in some low demand markets, flirting with $18,000 as the industry grappled with utilization in the low 40-percentile range.

Lower commodity prices have wiped out operator intentions for activity expansion in 2015 as most adopt a wait-and-see attitude while many plan to avoid expansion until WTI prices move back into the mid-$50 range on a sustainable basis.

Indeed, several publicly held oil and gas operators are still outspending cash flow in 2015 with hedges expiring and a futures market that seriously discourages further hedging. Many publicly held operators have not yet come to terms with the prospect of living within cash flow, and that will have a near-term detrimental impact on demand for drilling services.

Meanwhile, a sobering backlog of 4,000 drilled-but-uncompleted wells awaits completion before operators see the need to drill additional wells, while pundits have pushed the forecast for recovery out to second-half 2016. It’s hunker-down time for land drillers.

Comments