Contractors at the Edge of the Precipice

We’ve entered the Tom Petty zone of rig count decline. Talk to drilling contractors and they report business is Free Falling, Free Falling.

That’s particularly true in Texas and the Anadarko Basin. Tight formation rig count dropped 39 units this past week, including 22 units in the Permian, five in the Eagle Ford and six units in Oklahoma’s Anadarko Basin. The Permian is regressing towards the original peak in drilling rig activity in 2014. While other regional markets fell again after 2015, the Permian saw rig count move upwards countercyclically so a return to 2014 peak levels is a troubling milestone.

Rigs stacked out at the rate of five per day this past week and that rate of decline will accelerate going forward. Curiously, unconventional rig count has not changed materially in Appalachia or the D-J Basin, although the former was already operating at maintenance level only.

Midstream providers are talking about refusing new oil shipments as U.S. storage begins to fill toward capacity. The process will take 60 days assuming current trends continue, at which point some operators will be forced to shut in production. At that point, the trajectory in rig count decline will accelerate once more.   

WTI may be $20 on national television, but regional differentials are well below that. There has been discussion of negative oil prices because of the storage situation, something that hasn’t been seen since the hot oil days of the 1930s. The best analogy may be negative pricing for associated gas in West Texas. Shut-in production will certainly reduce flaring in the Delaware Basin, which is cruel irony for making headway on Environmental, social and governance (ESG).

Canada may see production shut ins this week. It’s a harbinger of what’s coming to the Lower 48.  

It does seem to be different this time. Regional drilling contractors who once found ways to retain the best crew members in downturns by providing work in the yard or on other tasks are now letting entire crews go when the rig is released.  That is evidence that contractors are entering survival mode. Let’s skip the impact on the well stimulation sector this week. Suffice it to say it’s worse for well site services than it is for drilling services. The rig count tells you how bad it is for the drillers.

So far, the Big Three drilling contractors (Helmerich & Payne IDC, Patterson-UTI Energy and Nabors USA) are down 33 units versus their first-quarter 2020 average. Remarkably, the Big Three represented 49% of rig employment in the first quarter 2020 and this past week saw share increase to 51% of rig employment, which is basically flat. At peak, way back in fourth-quarter 2014, the Big Three represented 34% of the market and 37% at the trough in second-quarter 2016. Obviously, these three contractors have fared the best since 2014.

Privately-held drillers represented a 24% market share this past week, down modestly from 27% for the first quarter 2020 average. Overall share has declined significantly from the 37% at peak in late 2014. This group has fared the worst. But make no mistake. The Big Three will take their hits over the next 60 days.

A look at customer profiles show large-cap E&Ps increased their share of rig employment last week to 26% of the market compared to 25% on average for the first quarter. Significant cuts in rig count have yet to start for them. Small/midcaps declined 2% to 23% of employed rigs last week. The big change, and what has impacted the privately-held drillers, is the 7% share loss among privately-held E&Ps last week to 36% of rig employment versus the group’s first-quarter 2020 average.

Large publicly held E&Ps have yet to commence dropping rigs at a rate commensurate with their stated budget cuts. As that happens over the next 60 days, watch for the impact to the Big Three and the remaining publicly held drilling contractors.

—Richard Mason

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Hart Energy’s exclusive rig counts measure drilling intensity. Our counts exclude units classified as rigging up or rigging down, and also exclude rigs drilling injection wells, disposal wells or geothermal wells. The result is our most accurate assessment of rigs on location working on oil or gas programs as of the sample date. While our process results in a rig tally that is lower than the published numbers from the non-proprietary rig-tracking agencies, Hart Energy believes our product presents the most accurate picture of what is actually occurring in the field.

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