Rig counts will continue to decline through the first and second quarter of 2015 before bottoming out in August at about 1,000 units, according to analysis by Wood Mackenzie.
The pace of idled land rigs is accelerating. In the the first two weeks in February, 200 rigs came off contract. In January, the rig count fell by nearly 200 to 1,616 from a peak of 1,859 in November 2014.
"The oil price collapse is hitting onshore activity and rig operators. Drilling rigs are currently being stacked at an alarming rate," says Scott Mitchell, research director, Wood Mackenzie.
Since the fourth quarter of 2014, 322 rigs have been idled as of Feb. 14, a drop of about 17%, according to Baker Hughes Inc.’s (NYSE: BHI) rig count. Most of those rigs, 302, were deployed for the drilling of oil.
Wood Mackenzie's outlook is for oil prices to recover during the year from the trenches of early 2015 with an annual average of $53.25 WTI.
However, should prices stick in the $40–50 per barrel range, the impact on rig counts could be even more severe, knocking the rig count down to less than 900 by summer. That would represent a 50% cut in operational U.S. land rigs from the highpoint in November.
Wood Mackenzie's 2016 forecast for oil prices is to recover to an annual average of $64 per barrel. The rig market would then see a slow but steady recovery with an average of 15 rigs added monthly through the end of 2016, Mitchell said.
For E&Ps, the upside is that declining demand for rigs is a lowering of rig day rates. In 2014 a high spec horizontal rig could demand a contract rate of $27,000 per day. Wood Mackenzie expects this to drop by as much as 30% in 2015 to an average day rate of $19,000.
"Rig contractors will clearly suffer in such an environment and those with the newest fleets, loaded towards horizontal walkable rigs, will fare better than their competitors," Mitchell said.
The picture for the U.S. E&P's is nevertheless mixed as budget cuts lead to fewer wells being drilled and completed. With service and equipment costs falling, activity should continue in areas that would otherwise be rendered uneconomic.
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