Rig Count: U.S. Land Drilling Market Getting Red Hot

Operators have now become price takers in the domestic market as day rates inch higher a few hundred dollars per quarter.

Hart Energy's exclusive rig counts measure drilling intensity. Our counts exclude units classified as rigging up or rigging down, and also exclude rigs drilling injection wells, disposal wells or geothermal wells. The result is our most accurate assessment of rigs on location working on oil or gas programs as of the sample date. While our process results in a rig tally that is lower than the published numbers from the non-proprietary rig-tracking agencies, Hart Energy believes our product presents the most accurate picture of what is actually occurring in the field.

It's a red-hot oil-services market.

And it's getting hotter -- and may last longer -- than the persistent Texas drought.

Operators have now become price takers in the domestic market as day rates inch higher a few hundred dollars per quarter. In fact, the best measure of the heat in the services market is evident by listening to the large number of oil and gas operators who are boosting capex while guiding for modest production growth in 2011.

On the other side of the negotiating desk, service providers are boosting capex as well as they add capacity in pressure pumping and land drilling to meet sustained demand for developing existing tight formation oil and gas plays.

However, a rash of announcements about new plays suggest that demand for drilling and pressure pumping equipment will remain strong into 2013 as this cycle spirals upward. Chesapeake Energy Corp., ever anxious to promote another JV, released results from its Utica Shale drilling program, in which the company is operating five rigs to evaluate its leasehold and is planning to move rig count in the Utica to eight by the end of 2011 -- and 16 to 20 rigs by year-end 2012. The Oklahoma City-based operator has drilled nine vertical and six horizontal wells in the Utica and identified a western oil phase, a central wet gas phase, and an eastern dry gas phase, and now claims the Utica is superior economically to the Eagle Ford shale play in South Texas.

Meanwhile, Southwestern Energy announced via its earnings call press release that it has leased 460,000 net acres in southern Arkansas and northern Louisiana for $150 million to explore the Lower Smackover Brown Dense, where it is targeting two wells in the second half of 2011. The unconventional formation is 300 to 550 feet thick and ranges from 8,000 to 11,000 feet deep.

Utica Shale, Tuscaloosa Marine Shale and Lower Smakover Brown Dense: it sort of makes last quarter's headline names such as the Niobrara sound like old news, doesn't it?

Another week, another four dozen newbuilds

On the capacity front, the Big Three domestic land drillers announced another round of new rigs for the U.S. market, bringing the total for the second quarter 2011 to 79 units—and 211 units since January 2010. The accelerating pace of new rig announcements foretells an expanding rig count through 2012. Helmerich & Payne IDC, Nabors Industries and Patterson-UTI Energy added a combined 44 rigs to the construction queues during the last 30 days. Invariably, these are high-spec technology rigs, often adapted with self-moving packages for pad drilling applications with Helmerich & Payne christening a new design model for its FlexRig pad drilling series.

Hart Energy toured a prototype version of the bi-directional skidding pad drilling rig, which is now branded as the FlexRig5, in June 2011. Of HP’s 20 announced newbuilds, 11 are FlexRig5 units. Helmerich & Payne is currently building three rigs monthly at its Houston fabrication facility but will ramp production to four units monthly in October 2011.

The 20-rig newbuild announcement in the last week of July brings HP's new rig plans to 32 during the last month, and 58 for the company’s fiscal year, which runs September to August. The Tulsa-based contractor currently has 42 of those rigs under construction. The new announcements are destined for larger oil and gas operators, including the majors, who are just now ramping up to exploit acreage acquired in areas like the Marcellus shale during the last year.

But HP is not alone. Patterson-UTI Energy is expanding its 50-rig newbuild program in 2011-12 to 55 rigs—including 30 in 2012.

Elsewhere, Nabors Industries has secured contracts for 36 new land units, including seven newbuild contracts, which the company announced in concert with second quarter earnings on July 26. Of those units, 23 are in the construction queue with deliveries expected through 2012. The company can currently fabricate two rigs monthly.

The Big Three domestic drillers -- Helmerich & Payne, Nabors and Patterson-UTI -- currently represent 71% of new land rig construction with several other publicly held national drillers yet to announce second-quarter earnings and any additional newbuild orders.

Combined, the Big Three generated $1.33 billion in top line drilling revenues in the second quarter 2011, despite weather-related disruptions in April and May. For the Big Three, that second quarter number represents 88% of the $1.5 billion in peak quarterly revenues in 2008. However, an aggressive newbuild program during the last half-decade culminated with Helmerich & Payne generating $539.4 million in contract drilling revenues during the second quarter 2011—an all-time record for domestic quarterly revenue volume by an individual land contractor. Nabors, at $405 million in the second quarter 2011, is at 77% of its peak 2008 quarterly revenue record, while Patterson-UTI, at $386.5 million, reached 78% of its 2008 quarterly revenue record.

And this cycle still has running room left.

Over on the well-stimulation side, Nabors pressure pumping subsidiary expects to reach 854,000 horsepower after planned capacity additions during the next three quarters, while Baker Hughes Inc. anticipates adding 350,000 horsepower to its BJ Services pressure pumping operations by the end of 2012. Patterson-UTI is expanding its pressure-pumping fleet by 280,000 horsepower with deliveries split between the second half of 2011 and calendar year 2012.

Much of this expansion is under firm multiyear contract, suggesting customers are expanding operations even beyond today's activity levels. Apparently record heat is not confined to Texas, which points to today's $64,000 question: When does a red-hot land market become white hot?

Current Rig Count
Type7/8/20117/15/20117/22/20117/29/2011
Gas Directional104113110108
Gas Horizontal534541547531
Gas Vertical111111113121
Gas Total (Land)749765770760
Oil Directional60777268
Oil Horizontal376394387393
Oil Vertical316313307321
Oil Total (Land)752784766782
Gas Shales317326330325
Oil/Liquid Shales350362358365
Tight Sands141141144138
Total Unconventional808829832828
Rigging Down (Land)128128151144
Rigging Up (Land)59585668
Total Rig Float (Land)187186207212
Deep5666
Shelf16171818
Inland Barge15171818
Total Offshore36404242
Drilling Offshore36404242
Drilling Onshore1,5011,5491,5361,542
Total Oil/Gas Drilling1,5371,5891,5781,584
Trends
TypeChange4-Week AverageCurrent vs. Average
Gas Directional-2109-0.7%
Gas Horizontal-16538-1.3%
Gas Vertical81146.1%
Gas Total (Land)-10761-0.1%
Oil Directional-469-1.8%
Oil Horizontal63881.4%
Oil Vertical143142.1%
Oil Total (Land)167711.4%
Gas Shales-53250.2%
Oil/Liquid Shales73591.7%
Tight Sands-6141-2.1%
Total Unconventional-48240.5%
Rigging Down (Land)-71384.5%
Rigging Up (Land)126012.9%
Total Rig Float (Land)51987.1%
Deep064.3%
Shelf0174.3%
Inland Barge0175.9%
Total Offshore0405.0%
Drilling Offshore0400.0%
Drilling Onshore61,5320.7%
Total Oil/Gas Drilling61,5720.8%
Historical
Type3Q 104Q 101Q 112Q 11
Gas Directional125119126107
Gas Horizontal574576556541
Gas Vertical178156119104
Gas Total (Land)877851801752
Oil Directional35384549
Oil Horizontal228280325346
Oil Vertical229261317323
Oil Total (Land)492579687718
Gas Shales382377362335
Oil/Liquid Shales229276303328
Tight Sands153171162145
Total Unconventional764824827808
Rigging Down (Land) 95110120
Rigging Up (Land) 535858
Total Rig Float (Land) 148168178
Deep2005
Shelf15141313
Inland Barge10141415
Total Offshore27282733
Drilling Offshore27282734
Drilling Onshore1,3691,4321,4901,469
Total Oil/Gas Drilling1,3961,4601,5171,503

Source: Hart Energy, Smith Bits (A Schlumberger Co.)

Contact the editor, Richard Mason, at rmason@hartenergy.com.