Sub-$50 Oil Leaves Most Of Midcontinent Uneconomic For Drilling

Synopsis

The Midcontinent doesn’t work economically at oil prices below $50.

Two months into the most recent pull back in oil prices, demand for drilling services has weakened across the region. Contractors are not only stacking rigs, they are scrapping older units.

Utilization has fallen to 37% among survey respondents. None of the survey respondents expected rig count to improve before year-end, pending some unexpected event globally.

Operators are still pressing contractors for price concessions, but many have cut pricing as far as they can and will stack units rather than work below cash cost. Some contractors are still pressing vendors for lower pricing, but those vendors are squeezed as well and reluctant to cut pricing further.

Rates for the benchmark 1,500 HP AC-VFD rig averaged $18,900 per day, although reports of pricing as low as $16,000 per day, surfaced during the survey. Most jobs are well-to-well, or monthly.

Watch for the next Midcontinent drilling report in January 2016.

Part I. – Survey Findings

Among Survey Participants:

• Rig Demand Weakens Further
  [See Question 1 on Statistical Review]
  ​In the last three months demand for land drilling rigs in the Midcontinent area has weakened according to six of the eight respondents. Most of the respondents believed demand would remain weak through the end of the year.
  • Mid-Tier Driller: “Demand has weakened mainly because people were hopeful when we saw $60 oil prices in July that we were on the rebound, but this increased uncertainty is going to cause a financial strain on the companies to make any plans and make it difficult to plan again because—if prices recover—anything is possible.”

• Excessive Rig Inventory
  [See Question 2 on Statistical Review]
  ​All respondents said that the rig inventory in the Midcontinent area was excessive. Two respondents said that some companies are selling old rigs as scrap rather than put them up at auction.
  • Mid-Tier Driller: “We are getting rid of our older rigs. We are not taking them to auction and selling them off, but sending them to the scrap yard because when demand does come back we want to use the most efficient rigs we have.”

• Utilization Estimate Drops To Lowest Point In 2015
  [See Question 3 on Statistical Review]
  Respondents estimated that rig utilization is at 37% in the Midcontinent area. Most agreed that utilization would not increase before the end of 2015 and possibly could take another year before it cycled back up significantly.
  • Top-Tier Operator: “A year and a half ago our county was seeing 10 and 15 rigs working and now we see between one and three working. That is just one county, but multiply that by as many counties and you will get a good picture.”

• Rig Day Rates At Low Threshold
  [See Question 4 on Statistical Review]
  ​Average day rates in the Midcontinent area for a 1500 HP rig varied between $14,900 and $18,900. Rig rate averages for various sizes and types given by survey participants can be seen in Table I below.
  • Top-Tier Driller: “Most operators are still asking for concessions, but we can't go any lower than what we are at right now. Most of the contractors I speak with are in the same boat. If we go lower on our day rate, we'd be working for practice because you can't make money any lower than this. If an operator wants me to go lower, I just tell him I can't and if he can find someone who can, then go ahead and contract with them instead.”

• Rig Rates Stable But Extremely Low
  [See Question 5 on Statistical Review]
  ​All respondents said that rig rates were as low as they could possibly go and that it is not a question of how low rates can go because operators are simply not drilling wells.
  • Top-Tier Driller: “A lot of oil companies are asking us for a significant reduction in rates. If you are all the way down to operating costs, why would you want to operate your rigs to work for this? We are asking all our vendors to lower their rates. Some are and some are being stubborn.”

• Cancellations Are Few And Far Between
  [See Question 6 on Statistical Review]
  ​None of the eight respondents said they were hearing about contract cancellations.
  • Mid-Tier Driller: “I haven’t heard of any contracts getting cancelled lately.”

• Contracts Vary But All Short Term
  [See Question 7 on Statistical Review]
  ​Four respondents said they have not quoted a contract in the past three months. Two said any contracts they were engaged in were well-to-well, while one respondent each said recent contracts have been multi-month or multi-well.
  • Mid-Tier Driller: “Mostly we are doing well-to-well contracts. We've been asked a lot of different things and have been very innovative on our side. We have been asked to enter a two-year contract and lock-in at today's market rate, but we don't want to do that. The longest contract we are signing is six months. We've also signed a contract and have a letter agreement with a variable rate scenario. We have a floor for our rates and then we have another clause that if oil prices at the end of the month or quarter closes at $60, we get to raise our rates.”

End Survey Findings

Survey Demographics

H A R T E N E R G Y researchers completed interviews with eight industry participants in the land drilling segment in the Midcontinent area. Participants included two oil and gas operators and six managers with drilling companies. Interviews were conducted during mid to late September 2015.

Part II. – Statistical Review

U.S. Land Drilling

[Midcontinent Area]

Total Respondents = 8

[Oil & Gas Operators = 2, Drilling Companies = 6]

1. Do you expect demand for drilling rigs to grow, remain the same, or shrink in third-quarter 2015 compared to the second quarter?

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

3. In percentage terms, what is your estimate of drilling rig utilization in your area?

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? By what percentage?

6. Are any contracts being cancelled and, if so, what is the penalty?

7. How would you describe contractual market-share in your area of operations?

End Statistical Survey