With sell side analysts theorizing that increased onshore service sector activity in 2014 is a precursor of pricing power, there has only been one problem. To date, evidence of pricing power outside the well servicing sector has been close to nonexistent among the major service lines.
But it is now possible to place an asterisk on that argument. The pricing for drilling rigs is in fact going up, according to a Hart Energy survey of Marcellus land drilling contractors and oil and gas operators, but not for the reasons the sell side expects.
The Hart Energy survey conducted during the first week of May involved six contract managers with drilling companies and included two oil and gas operators.
The survey found current demand for land drilling rigs in the Marcellus/Utica steady. When an operator lets a rig go, it soon finds work elsewhere in the Marcellus or Utica. Net demand for drilling services is not changing, survey respondents said, and none of the survey participants expected rig count to rise materially in the near future. In fact, all respondents said the existing regional rig fleet was sufficient to meet any increase in demand for drilling services.
And this is where the asterisk comes in. There is pricing power available to contractors who build higher-spec rigs, which are beginning to displace existing equipment.
In other words, operators are willing to pay for enhancements to drilling capability—sometimes as much as an extra $5,000 per day depending on rig configuration—as the Marcellus moves to longer laterals and more wells per pad.
“We are going through our second round of newbuilds in the Marcellus,” one top-tier national driller told Hart Energy surveyors. “We are seeing a round of not just a new rig, but a new rig with a better understanding of what we need for pad drilling: better mobility and also higher horsepower for mud pumps, bigger top drives for torque on long laterals, and good hookload capability. We need that hook load.”
And that gets back to the issue of pricing. The way contractors are recognizing higher prices is not through rising rig rates on existing equipment. Rather, it is by upgrading the fleet.
According to the Hart Energy survey, average rig rates for a standard 1,000 horsepower (hp) Tier I rig are $20,000 per day currently in the Marcellus/Utica. These are actually a little lower than rig rates in the February 2014 Marcellus/Utica survey. However, rates for newbuild rigs are $22,000 per day for 1,000 hp units, or about 10% higher. Similarly, higher-spec 1,500 hp rigs average $23,000 per day in the Marcellus/Utica currently, down slightly from the February survey. Newbuild 1,500 hp Tier I rigs bring rates of $26,000 per day.
The main change, market-wise, is the ongoing push to extend laterals and add more wells per pad. Consequently, operators are expressing interest in new, higher-spec 1,500 hp Tier I rigs with walking packages, upgraded fluid handling capacity, larger top drives and greater hoist capacity. Those rigs bring higher rates and are replacing existing lower-spec units, survey respondents said, keeping rig count flat.
Contact the author, Richard Mason, at rmason@hartenergy.com
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