Rig Rate Cuts Hit Dry Gas Basins

Synopsis

The cost cutting carnage in the oil markets has found its way to the traditional dry gas shale plays, including the Barnett, the Fayetteville and the Haynesville. Average rig rates are down 27% sequentially in this survey, and approaching 30%. Those are considered cash costs, a point at which some contractors stack equipment rather than work at an operating loss. Some operators have bought out drilling contracts; others are working with contractors to re-shuffle contracts to produce lower day rates while extending the length of the term. Activity in the traditional dry gas shale plays has held as operators pursue lease obligations. Some Haynesville contractors note bid interest picked up in recent weeks.

Part I. – Survey Findings

Among Survey Participants:

• Rig Demand Falling QTQ
  [See Question 1 on Statistical Review]
  ​Demand for land drilling rigs weakened in 2Q15 versus 1Q15 as continued low oil and gas prices have put a damper on demand. Wells under contract are being drilled for leaseholds, but otherwise work has been scaled back.
  • Top-Tier Driller: “I wouldn't say it is ‘doom and gloom’ anymore. We already hit that, but we are having to cut our workforce and watch everything we do and work strictly off of performance.”

• Excessive Rig Inventory
  [See Question 2 on Statistical Review]
  ​All respondents said rigs have been stacking in the Dry Gas Basin for the first four months of the year; however two respondents said they have also seen some rigs picked up recently. One of the respondents said that demand in the Haynesville Shale area was not as hard hit as the broader Dry Gas Basin.
  • Mid-Tier Driller: “We laid down a couple of rigs, but actually picked them back up just recently.”

• Newbuild Orders Stall in the Dry Gas Basin area
  [See Question 3a and 3b on Statistical Review]
  ​None of the respondents had newbuilds on order in the Dry Gas Basin area nor do they expect that companies will be ordering new rigs given the amount of rigs available.
  • Mid-Tier Driller: “There are not any newbuilds coming in right now. When things were going better, drilling companies got into contracts for newbuilds with bigger operators. So to protect themselves, they did a three or four-year unbreakable contract. These are being honored because those rigs were built specifically for those operators.”

• Rig Day Rates Under Pressure
  [See Question 4 on Statistical Review]
  ​The range for rig rates in the dry gas basins varied in 2Q15 from $16.5K to $23.5k for 1500-HP AC rigs. On the higher end, these rigs are under contract and the lower end represents concessions operators have asked of the drillers. That range was $22k to $26k in 2Q14. Some rates are being discounted by 27% on average and some rigs are still under long-term contracts at their original prices. Rig rate averages given by survey participants can be seen in Table I below.
  • Mid-Tier Driller: “We’ve had to lower our dayrates 30% QTQ to keep them working.”

Table I – Average Day Rates for Certain Rigs Sizes in Dry Gas Basin area
[Rates shown are an average ‘per day’ rate among all respondents in the category.] (k = thousand)

• Rig Rates Down 27% on average QTQ
  [See Question 5 on Statistical Review]
  ​All respondents said that rig day rates had dropped QTQ by 27% on average due to lower commodity prices. Rig rates are expected to stay under considerable pressure if commodity prices do not go back up.
  • Mid-Tier Driller: “We are trying to get our rigs to work at a 30% discount to what we were getting. We want to make payroll.”

• Contracts Holding in Dry Gas Basin
  [See Question 6 on Statistical Review]
  ​All but one respondent said that the contracts in the dry gas basins area are holding. One large driller said that some operators had paid to get out of contracts.
  • Top-Tier Driller: “We have seen a few large operators buy out contracts, but mostly we are creatively restructuring contracts for operators.”

• Strategy for 2015 is: Do Only What is Necessary
  [See Question 7 on Statistical Review]
  ​The nine respondents said they are coping with the lower commodity prices by drilling only leaseholds or contracted wells. Drillers are lowering prices to keep as many rigs working as possible, but one respondent warned they are near cost right now because their margins have been squeezed so thin.
  • Mid-Tier Operator: “We've just drilled a well, but we have cut way back on our drilling and doing what we need to do to hold the acreage. It looks like we made a good well, so we're excited. We have been through this before. I guess this is the 4th downturn that I've been through. What saved us in the past was that we had very little debt and now we don't have any debt. We will wind up cutting back on our production and not be so anxious to spend money to improve production, rather we will just hold leases.”

• Completions Down Slightly
  [See Question 7 on Statistical Review]
  ​Two of the nine respondents said that companies are drilling wells but not completing them; the other seven reported that operators are completing wells.
  • Top-Tier Operator: “I hear companies are drilling and not fracking. Rather they are just shutting them in and waiting, but we are not doing that. We are completing every well we drill.”

End Survey Findings

Survey Demographics

H A R T E N E R G Y researchers completed interviews with nine industry participants in the land-drilling segment in certain dry gas basins in the Barnett, Haynesville, and Fayetteville shale areas. Participants included two oil and gas operators and seven managers with land drilling companies. Interviews were conducted during early April 2015.

Part II. – Statistical Review

Land Drilling Segment

[Dry Gas Basins]

Total Respondents = 9
[Oil & Gas Operators = 2, Drilling Companies = 7]

1. Do you expect demand for drilling rigs to grow, remain the same, or shrink in 2Q15 compared to 1Q15?
Shrink: 9

2. Would you characterize the supply of rigs in your area as excessive, sufficient, or insufficient to meet 2015 demand?
Excessive 9

3a. In your area, do you expect there will be an influx of newbuild rigs during the next six months?
No: 9

3b. What size and type of rigs do you expect will come into the market?
Not applicable 9

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?
[Rates shown are an average ‘per day’ rate among all respondents in the category.] (k = thousand)

5. Do you expect rig day rates to increase, remain the same or decrease over the next 3 months?
Down 15% 1
Down 18% 1
Down 20% 1
Down 22.5% 1
Down 25% 1
Down 30% 3
Down 50% 1
Average Down 27%

6. Are any contracts being cancelled and, if so, what is the penalty?
No contracts cancelled or bought out 8
Contracts are being creatively reconstructed 1

7. What strategies are being put in place to cope with low prices?
Control costs, slow work 3
Discounting rates to keep rigs working 4
Dropping rigs 1
Continue to drill to hold leases 1

8. What are you seeing in terms of the number of wells drilled versus completed?
Wells drilled are being completed 7
Operators are drilling and not fracking 2