Drilling contractor executives were clear during first-quarter earnings calls: Only the strong will survive. In this case, the strongest contractors have active pad-optimized rigs drilling in the Permian.

The Permian Basin remains the most active basin, accounting for 35% of the active U.S. land rig market. So far in 2016, Pioneer Natural Resources Co., Exxon Mobil Corp., Devon Energy Corp., Discovery Natural Resources LLC and Concho Resources Inc. drilled and completed wells with lateral lengths approaching 4,267 m (14,000 ft). Numerous others are drilling shorter laterals across the Delaware and Midland basins.

This revolution in optimization, combined with low rig counts, has turned the U.S. land sector into a commoditized market, and the nuanced capabilities necessary to meet operator demand for extended capability influence the rate of utilization. More than 1,500 rigs now sit idle in yards across the shale plays.

Is there a limit to drilling optimization? Certainly, the top-performing rigs are still working, but what is left to optimize? The oversupply of top-tier rigs will continue to keep prices down while optimization (reduction of drilling days) will keep a cap on revenues. Will rig crews suffer the same consequences as those faced by pressure-pumping frack crews? Frack crew pricing is not sustainable, according to recent Schlumberger, Halliburton and Patterson-UTI executive interviews. Short-term thinking was one cause of the pressure pumper’s challenges, and that same short-term thinking is evident in the land drilling sector.

Permian holds strong
Tier 1 pad-capable walking or skidding rigs are still at work in the Permian, Midcontinent and Rockies. Helmerich & Payne (H&P) has 39 FlexRigs contracted in the Permian, with more than 60 more ready to work, according to President and CEO John Lindsay during H&P’s first-quarter earnings conference call. High-spec pad-capable rigs are the last rigs standing in the market, and stacked Tier 1 pad-capable rigs will be the first ones put back to work.

Many of the leading pad drilling contractors are converting rigs or introducing changes to their rig fleet to meet operators’ needs for pad optimized processes.

The recovery story is beginning to take shape but in different ways. There was optimism—albeit cautious optimism—during earnings calls about the industry’s recovery. The emphasis is on cost reduction and optimization. Despite an ongoing list of technology advances, the cost of labor and organizational capacity will limit the pace of the industry’s recovery.