The first hard evidence of material change for U.S. land drillers was found innocuously tucked away in the bottom third of the Unit Corp. news release July 11 on its $671 million purchase of non-core Granite Wash properties from Noble Corp.
The sentence was quite simple: “Also during the quarter, Unit had three drilling rigs that were under long-term contracts that were terminated early by the operator. The early termination payments associated with these contracts are approximately $15 million.”
Early termination with pay suggests recent turbulence in pricing for natural gas and NGLs, and oil is now impacting operator capital spending and operator perceptions of the future.
Contract cancellations for three rigs imply that one operator foresees an extended period of lower commodity prices.
Multiyear term contracts serve as an oil and gas barometer. They affirm perceptions of health in the industry’s prospects, as noted in the 260 new-build drilling rigs ordered in 2010 and 2011 under contracts that in some cases stretched out for half a decade.
But they can also signify the opposite, since contract cancellations are rare, expensive, and seldom a spur of the moment decision.
Multiyear term contract cancellations reveal stress in the industry and were a common feature of the 2008 massive commodity price collapse.
Unit’s July 11 announcement indicates there will be more ears listening in on land-driller earnings calls during the next 30 days — in addition to the stressed pressure pumpers — for hints about the sector’s second half of 2012 outlook.
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