Drilling Rig Rare Sight In Dry Gas Shale Basins

Synopsis

All is quiet on the dry gas front in the Haynesville, Fayetteville and Barnett shales.

After a brief uptick in Haynesville rig count as operators implemented enhanced completions, rigs are once again stacking out. Horizontal drilling has essentially ceased in the Fayetteville, or fluctuated between one to two rigs drilling horizontally in the Barnett Shale. Activity in East Texas remains spotty.

Overall rig count for the three dry gas basins is down about 75% vs. peak as operators only do what is necessary while awaiting improved commodity prices.

Operators need to see sustained natural gas prices of $2.90 before activity expands in the three dry gas plays, according to Heard In The Field survey respondents. For oil-directed activity, respondents indicated a sustained price in the low $50 range would serve as an activity stimulus.

Average rig rates have fallen about 4% for the benchmark 1,500 horsepower (hp) AC-VFD unit over the last six months.

The rate of decline is lower than other basins. It reflects both a low level of overall drilling activity with many rigs still under long-term contracts signed before the downturn.

Leading edge rig rates are in the $15,000 per day range for the benchmark 1,500 hp Tier I unit.

Watch for the next Heard In the Field report on the dry gas basin drilling market in September 2016.

Part I. – Survey Findings

Among Survey Participants:

• Only Necessary Work
  [See Question 1 on Statistical Review]
  ​All seven respondents said that only necessary work was being done this quarter. One of the seven respondents said that while they had come into the year with a modestly ambitious drilling program, they had cut that by 70% after determining 2016 would be slower than anticipated.
  • Mid-Tier Operator: “We are only drilling what we have to to maintain the acreage. We drilled one well this year and we will be drilling another in August, and possibly will drill one more before the end of the year. We are hunkering down. This boom stayed longer than what we though it would at first. What saved us was we had very little debt. So now we are trying to find the best way to use capital.”

• $52 Per Barrel Would Lift Demand
  [See Question 2 on Statistical Review]
  ​Respondents gave a range of oil prices that would signal a turnaround for them. Two respondents said the price per barrel could be as low as $45, while two respondents said oil would need to be $60. The other three respondents were somewhere in between with the average of all respondents at a sustained $52 before operators developed enough confidence to start drilling again.
  • Large Driller: “Oil would have to be at $50 per barrel and stay there. That would at least get the phone ringing. Sixty dollars per barrel would be better. A lot of the people I visit with say oil needs to be at $60 to $65, but I think we would see some action if it was between $45 and $50.”

• Gas Inching To ~$3 Would Spark Demand
  [See Question 3 on Statistical Review]
  ​Respondents gave a range of gas prices that would spark demand with an average price of $2.90 as the trigger for more activity in these gas-prone plays. Responses ranged from $2.25 to $3.50. Two respondents said gas would need to be $2.50, two said $3, and two said $3.50. One respondent said gas could be as low as $2.25.
  • Top-Tier Driller: “In East Texas, the majority of our work is natural gas and $3 and above would get things going again.”

• High HP Rigs All Inclusive
  [See Question 4 on Statistical Review]
  ​Day rates in the dry gas basin for a 1,500 hp AC Tier I rig range between $15,000 and $18,000 and are averaging $16,500, down from $17,200 reported in September. The high-end of the range represents rigs that have been on long-term contract and are outfitted with full packages. Rig rate averages given by survey participants can be seen in Table I below.
  • Small Operator: “We are not going to drill any wells and we are in a couple of different fields. Rig rates have come down. We are kicking around the idea of doing two wells this year. One would be drilled in August and a second one and that would take care of next year.”

• Rig Rates Still Under Pressure
  [See Question 5 on Statistical Review]
  ​All seven respondents said that rig rates continue to be under pressure and all expect rates to be flat second-quarter 2016 compared to the first quarter because demand for land drilling rigs has slowed down to only 25% of what it had been in mid-2014 before the downturn.
  • Mid-Tier Operator: “I know that we are doing a lot more than others immediately in our vicinity. There are only a few rigs running in North Texas in the Barnett area. I'm getting calls from people I've never heard of these days.”

• Activity Is Minimal In Dry Gas Basin
  [See Question 6 on Statistical Review]
  ​All seven respondents said that activity in the area was minimal as most companies were hunkered down trying to weather the downturn.
  • Top-Tier Driller: “The weaker drilling companies are in a bind right now. We are doing okay. We have a lot of rigs sitting, but we are holding our own.”

• No One Out Of Business Yet
  [See Question 7 on Statistical Review]
  ​Six respondents said they do not know of any drilling companies that have gone out of business yet even though activity is at a minimum pace. However, one respondent said oil and gas auctions are filled with companies trying to offload equipment to generate cash flow.
  • Large, Independent Operator: “We don’t see anyone active in this area right now. We are clearing out our debt and are looking to be restructured and begin drilling towards the end of the year.”

• Operators Delaying Payments
  [See Question 8 on Statistical Review]
  ​Four of the seven respondents said that operators have been stretching payments to between 90 and 120 days and that everyone seemed to be taking longer on payments. Another three said there had been no issues with payments.
  • Small Operator: “Operators are stretching out payments. We don't have anything over 90 days old. The ones we are doing business with are going to be here.”

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 dry gas basin. Participants included four oil and gas operators and three managers with drilling companies. Interviews were conducted in late March 2016.

Part II. – Statistical Review

U.S. Land Drilling

[Dry Gas Basin]

Total Respondents = 7

[Oil and gas operators = 4, 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?

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

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

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?

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

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

8. Are operators delaying paying their invoices? If so, are companies taking special steps to collect receivables?

End Statistical Survey