April 27, 2010

Times are tough for owners of small, mechanical rigs today. The 1Q 2010 issue of The Land Rig Newsletter’s Day Rate Report reported that fleet utilization of <500 hp rigs has languished below 50% for more than six months now. In fact, that group’s utilization rate has been above 60% only three times since October 2008. Consequently, some small drillers in conventional-gas-prone areas that are still working are doing so at cash operating costs.

The Day Rate Report also cited just one regional rig class in the U.S. that failed to recover in terms of rig rate appreciation from October 2009 to April 2010: Day rates for <500 hp rigs in the Midcontinent dropped again last quarter while rates were up everywhere else for every other type of rig.

These indicators suggest that the small drillers with the low-spec mechanical rigs will likely undertake most of the scrappage this year and be more likely to close their doors. 

April 13, 2010

According to 1Q 2010 surveys by The Land Rig Newsletter’s Day Rate Report, drillers are generally optimistic over market conditions in oil basins.  However, drillers reported that lower natural gas prices have begun to dampen prospects for more drilling in the near term, and many operators are pessimistic over the low gas price as well.  In any case, market conditions in the industry have improved since the same time last year when drillers in the 1Q 2009 survey reported prospects for work were very low for both oil and gas drilling.  At that time, there were no wait lists, no bid inquiries for future work, and work backlogs were at a standstill. In the current 1Q 2010 survey, however, market conditions are showing an improvement since the 4Q 2009 survey.  Observing the four surveys completed and published in the Day Rate Report over the last year, all indicators point to “bottom” in late 2Q 2009 or early 3Q 2009 and improvement in 4Q 2009. 

April 6, 2010

According to analysis by The Land Rig Newsletter’s Biweekly Report, operators in 2010 will focus on heavy drilling programs in the shales driven by leasehold commitments, and more asset sales and high hedging levels to backstop cash flow and drilling budgets. Drillers can expect a return to term contracts, especially in the most competitive shales, and more emphasis on liquids-rich plays. As the ongoing shale frenzy contributes to the gas glut, gas prices will slump further, with more big, high-spec rigs finding more work to offset a rig count decline in conventional gas areas. As the gas rig count flattens, the oil rig tally will continue to snatch market share.

What’s driving drilling? The desire to retain hard-fought leasehold positions. During 2007-09, operators assembled more than 10 million acres in just the Haynesville and Marcellus shales. Leases are typically for 3-year terms, suggesting much to be drilled and little time to drill it. Hence, we believe the surge in Louisiana and Pennsylvania drilling still has legs, which could be the death knell for gas prices later this year.