Rates For Tier I Rigs Drop Below $18,000

Survey Demographics

Permian Basin drillers are concerned over the current direction of the market.

The region had seen the first green shoots of modestly higher demand late in second-quarter 2015. However, oil prices fell again.

Now contractor sentiment is dropping once again. Apparently $60 WTI sustained remains a key threshold for operators looking to put equipment back to work.

Fleet utilization of 41% could go lower yet as the region is characterized by an excessive oversupply of drilling rigs in all classes. There is discussion that some drilling contracts may revert to footage contracts instead of contracts on a day-rate basis.

Leading edge rig rates for the benchmark 1,500 HP AC/VFD Tier I rig have dropped below $18,000, down from the $27,000 at peak roughly a year ago. When a rig rolls off an existing contract, that rig is being stacked out.

Bidding activity has fallen to extremely low levels. Those contracts that are let on a day-rate basis usually involve just a well at a time or two or three wells only.

Watch for the next Permian Basin drilling report in December 2015.

Part I. – Survey Findings

Among Survey Participants:

• Rig Demand Worsens Quarter-To-Quarter
  [See Question 1 on Statistical Review]
  ​After stability earlier this summer, rig demand grew uncertain again when oil prices dipped lower in July. Two respondents said demand had weakened quarter-to-quarter, although six others said it remained steady, but low.
  • Mid-Tier Operator: “I know for us personally things have gotten worse. We took out a line of credit and every day that goes by with uncertainty puts a strain on our business. I don't know that fundamentally things have changed, but even if it got back to $60 per barrel tomorrow—do you have any faith it will stick? I sure don't.”

• Excessive Rig Inventory
  [See Question 2 on Statistical Review]
  ​All respondents agreed that there is an excessive amount of land drilling rigs in the Permian Basin area. Respondents who had seen some rigs being picked up in June said that now that oil prices have dropped again, demand for rigs had dropped as well.
  • Mid-Tier Operator: “It's about the same. Lots of people were looking at picking up rigs a month or so ago and now they have backed off of that. There was some optimism at $60 oil and we were talking about additional rigs. Drilling contractors were getting a lot of calls. Then announcements came out from China and Iran and things just got worse.”

• Less Than Half Of Rigs Utilized
  [See Question 3 on Statistical Review]
  ​Respondents estimated that rig utilization is around 41% in the Permian Basin. Most agreed that utilization would continue to hover in the 40-45% range through the back half of 2015 and could possibly go lower if oil prices were to stay low or drop further.
  • Mid-Tier Driller: “Utilization is between 40-45%, although I feel that it is going to come down some more because some folks are just starting to feel the pain of what is going on out here.”

• Rig Day Rates Stable, But Low
  [See Question 4 on Statistical Review]
  ​The day rates in the Permian Basin area for a 1500 HP A/C rig varied between as low as $16,500 to $18,000. Rig rate averages given by survey participants can be seen in Table I below.
  • Mid-Tier Operator: “The rates for drilling rigs are as low as some of them can go. Some contractors may have to start charging footage contracts rather than day rates. Footage didn't go away, but we may see more of it.”

• Rig Rates Still Under Pressure
  [See Question 5 on Statistical Review]
  ​Respondents said in June that rates could not go any lower, and now two respondents are questioning if rates might be lowered again during the next three months as demand dips again.
  • Mid-Tier Operator: “Demand has softened in the last three months. It has gotten gloomier out here.”

• Contracts Stable In Permian
  [See Question 6 on Statistical Review]
  ​One of the eight respondents said that contracts were being cancelled in light of the lower oil prices. However, seven respondents said that they have not heard of additional contracts being cancelled.
  • Top-Tier Driller: “We are not seeing any cancellations of contracts, but we are also not seeing any renewals.”

• Contracts Address Short Term
  [See Question 7 on Statistical Review]
  ​Respondents said that contracts run from well-to-well to month-to-month, as uncertainty has caused most contractors and operators to focus on the short term.
  • Mid-Tier Driller: “Contracts are pretty much do whatever you want, but mostly it’s well-to-well or a three-well package.”

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 Permian Basin area. Participants included six oil and gas operators and two managers with drilling companies. Interviews were conducted during early September 2015.

Part II. – Statistical Review

U.S. Land Drilling

[Permian Basin]

Total Respondents = 8

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

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?

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