As of August 2011, the U.S. land rig fleet had grown by 154 units, or 4.6%, year-over-year, to 3,459 from 3,305 in August 2010, according to The Land Rig Newsletter. This includes rigs that are planned or under construction, plus rigs for which status or horsepower could not be determined. Excluding these outliers, rigs with horsepower ratings of ≥1,000 hp accounted for a YOY increase of 150, or 10%, to 1,650. The ≤1,000 hp rigs rose by 14, or less than 1%, to 1,616. It seems that, for the first time ever, the ≥1,000 hp rig classes now account for the majority of the total land rig fleet. Throw in the newbuilds, and that majority grows even more. Despite a YTD gain of more than 200 in the active rig count, the number of stacked or sold/for sale rigs ballooned by 37% YOY, which LRNL sees as a sign of stability as uncertainty fades from the market.

While ≤500 hp rigs still lag all others in terms of utilization, in fact, their improvement in that area has led the way this year. This smallest class of rigs was hit the earliest and hardest by the recent downturn. Since the beginning of this year, however, utilization for this class has jumped by 33% vs. an aggregated gain of 4% for the other four combined rig classes. What’s driving this improvement? Beyond oil price strength, according to The Land Rig Newsletter’s Biweekly Report, there has been a big increase in the number of active operators, notably small private operators who also had the largest increase in active rig count (15%) among operator classes. This reflects the many small operators who don’t typically drill year-round. The Land Rig Newsletter team sees loosening credit availability and a generally improving climate for investor interest in drilling for and producing oil. At the same time, small drillers are keeping a tighter rein on marketed rig numbers. Consequently, ≤500 hp rigs are, if not exactly thriving, no longer on life support.

Even with increased drilling activity and utilization, the 2Q 2011 growth in day rates was precisely the same as it was in 1Q 2011: 3%. That is far below the quarterly gains of 13% and 12% in first half 2010. That’s according to the latest issue of The Land Rig Newsletter’s Day Rate Report. The 600–750 hp group saw average day rates across all regions increase by 1.8% in Q2. Compare that with an average quarterly gain of 7.4% for first half 2010. In 2Q 2011, average day rates for the 1,000 hp class rose by 4.6% vs. a quarterly day rate hike of 13% in first half 2010. The difference is even more stunning with the 1,500 hp comparisons. These highly sought-after rigs in 2Q 2011 virtually duplicated their 1Q day rate increase of 3.5%, coming in at 3.4%. But this class saw a big jump in day rates a year ago with an average quarterly gain of 17.5% for first half 2010—including a wild 22% spike in Q1 2010.

The pace of growth in land rig day rates began to moderate in 1Q 2011. After averaging growth of 8.75% in 2010, the aggregated average U.S. land rig day rate across all regions and all horsepower classes rose only 3% in 1Q 2011, according to the latest issue of The Land Rig Newsletter’s Day Rate Report. Of course, signs of moderation in day rate increases cropped up in second half 2010, as respective jumps of 13% and 12% in Q1 and Q2 gave way to a 5% increase each in Q3 and Q4.

 

Another way to look at the slowdown in rate growth is from the perspective of the average day rate weighted to 600–750 hp rigs, which rose only 2%. The culprit? Declining growth in overall demand for rigs and gas-directed rigs in particular. But deceleration day rate growth to a quarterly increase of a 3%—or even 2%, for that matter—is hardly cause for panic, especially after rates in the first quarter of this year climbed to their highest level in more than two years.

The next step in the evolution that defines U.S. oil and gas drilling today has begun:  the migration of the business model that has driven “unconventional” drilling to “conventional” reservoirs. The Land Rig Newsletter team, in their latest Biweekly Report, notes that Helmerich & Payne is signing newbuild contracts for rigs designed for the shale plays to be deployed to conventional basins.

 

In addition, a hot new non-shale play emerging in the Midcontinent region—specifically the Mississippian play now spreading from northern Oklahoma to southern Kansas—features high-permeability, shallow carbonate reservoirs targeted for low-risk, low-cost redevelopment with repeatability and scalability via horizontal drilling and multistage fracs. The play’s leader, SandRidge, is trying the same approach in conventional reservoirs in the Permian Basin as well. This is good news for all those stacked <1,000 hp rigs, as such plays don’t need the bigger rigs they’d have to compete for against the shale plays.

From the March edition of The Land Rig Newsletter:

 

Top drive costs are rising as suppliers scramble to keep up with demand for this critical component amid an embryonic newbuild surge driven by the unconventional drilling boom.

 

Suppliers report growing backlogs and wait lists for both sales and rentals in line with growing demand spurred by accelerated drilling in unconventional resource plays. Top drives are considered an essential component for the >1,000 hp rigs that dominate U.S. unconventional drilling these days. At the same time, growing demand in the international market—in particular Russia, Latin America, and the Asia Pacific region—is adding to supply pressures. However, pricing is better in North America relative to an international market dominated by term contracts.

 

Tesco, for example, reports an increase in its current backlog of top drive orders to 30 from 25 at yearend 2010—including 22 new orders. That compares with a backlog of only 11 at yearend 2009. Tesco expects to produce 6 to 8 units per month this year compared with 4 to 6 units per month last year. About half of its orders are for newbuilds and half are for retrofits. The company also expects to expand ...