Crude Oil ( ) Brent Crude ( ) Natural Gas ( ) S&P 500 ( ) PHLX Oil ( )

The activity of independent E&Ps in the United States garnered plenty of news headlines in the recent earnings season, with the overwhelming majority dialing back their 2015 capital plans. Major producers like California Resources Corp. (ticker: CRC), LINN Energy (ticker: LINE), Oasis Petroleum (ticker: OAS), Rosetta Resources (ticker: ROSE), Whiting Petroleum (ticker: WLL) and WPX Energy (ticker: WPX) have all cut back year over year expenditures by at least 50%. A total of 65 company guidances compiled by EnerCom forecast an average cut of 34%.

While E&Ps are in control of their destiny, the same cannot be said for drilling contractors. The oil price downswing has affected all segments of the industry, ranging from the gas pumps to the drillbit, and drillers are at the forefront of domestic production that is projected to flatten in April.

“The U.S. drilling market is contracting rapidly and that is rippling through other markets globally,” said Anthony Petrello, President and Chief Executive Officer of Nabors Industries (ticker: NBR), in a recent conference call. “Going forward, we expect continued erosion in both the industry’s and our rig count.”

State of the (Rig) Union

United States rig counts coincidentally mirror the average capex cuts, and are down roughly 38% since the beginning of December. In turn, rig utilization rates have plummeted. Nabors said only 68% of its fleet is in service compared to its all-time high of 94%, while Trinidad Drilling reported utilization of approximately 70% of its rigs. Unit Corporation (ticker: UNT) said it is currently running 47 rigs, down from its Q4’14 average of 83.

“As the exploration companies have reduced their drilling budgets due to commodity prices, the rig contracting business is certainly going to follow with rigs being released and contracts not being renewed,” explained Larry Pinkston, President and Chief Executive Officer of Unit Corporation. The “limited number” of available contracts have been an additional hurdle, but Pinkston said Unit has been successful in locking up new deals.

Well-Cost-Sensitivity-chart-1211-Large

Revenues Tightening

With virtually every oil-focused E&P reporting lower quarter-over-quarter revenues due to $50 oil prices, producers are seeking every possible way to save a few extra dollars. That includes hedging, renegotiating contracts and even raising extra capital via stock offerings to pad their balance sheets. Oilservice providers like Core Laboratories (ticker: CLB), Halliburton (ticker: HAL) and Schlumberger (ticker: SLB) all discussed initiatives to cater to their customers in recent conference calls.

The basis was simple: Get more with less. Generally speaking, that means extract more resources while using less capital and fewer rigs. That’s a tough prospect for E&Ps and an even tougher prospect for the services and drilling segments, considering their clients are clamoring for lower costs. Trinidad Drilling mentioned in their call that dayrates are down as much as 20%.

“While downturns do not repeat, they do have similarities,” said Mark Siegel, Chairman of Patterson-UTI (ticker: PTEN). “Therefore, the playbook is relatively simple: scale down the company as quickly as possible to align with the lower levels of drilling activity.”

Andy Hendricks, President and Chief Executive Officer of Patterson-UTI, said: “In Q4 as the rig count started to come down, these were thoughtful processes around dropping the smaller rigs, vertical rigs, things like that. And then as we moved in towards the end of December as oil prices continued down and certainly the beginning of January, the customers just became more indifferent, this became more of a math problem for operators as they’re trying to release rigs and get everything within their budgets.”

Quality over Quantity

With the rig count down nearly one-third since December, E&Ps are opting for quality over quantity, upgrading to new state-of-the-art rigs and ditching the older ones. Unit’s BOSS rigs were introduced last year and were contracted quickly. The elite rigs by NBR are fully contracted, and PTEN’s top rigs are being 98% utilized. Trinidad Drilling’s Chief Executive Officer, Lyle Whitmarsh, said his company is experiencing a similar trend. “In speaking with our customers, we see some opportunities over the coming months to put rigs back to work as they high grade their existing equipment they are using – mostly in the Permian or Eagle Ford areas,” he said in TDG’s conference call. Nabors also used the “high grade” term in their call, mentioning it was involved in discussions with several potential customers on “upgrading to higher performance rigs.”

BAKER HUGHES RIG COUNT
Region

12/5/2014

3/6/2015

California

43

14

Colorado/Wyoming

129

71

North Dakota

180

105

Oklahoma

211

139

Ohio/ Pennsylvania/
West Virginia

131

99

Texas

896

538

TOTAL U.S.

1,920

1,267

Rig counts have remained relatively consistent in gas plays but have declined dramatically in oil-based areas. Texas alone has dropped 358 rigs, or roughly 40% of its fleet, since December 5, 2014, while North Dakota has laid down 75 rigs (42%) in the same time frame. Whitmarsh said the industry is also noticing a slowdown in Canada and expects “weak” results in Q2’15.

Long Term Outlook Unclear

Even though the newest rigs to the fleet offer upside to E&Ps, their presence does not affect the industry’s bottom line: Contracts.

“Operators are slashing their capital spending commitments and are shutting rigs based on the lack of term contracts rather than on the quality of the rigs or the drilling performance,” said Petrello of Nabors.

Drilling companies were extremely guarded in their outlook on their respective calls. Patterson-UTI declined to provide any detail on rigs that were being shelved. “Everything is dynamic at this point,” was the extent on which Siegel elaborated.

Trinidad Drilling offered a light at the end of the tunnel approach in reference to the falling rig counts, saying reductions have slowed. “We are getting a lot more stability than we’ve seen at the end of December or the start of January,” said Whitmarsh. “Are we completely finished? I’m not 100% sure of that, but we’re definitely getting much more comfortable where we are now.”

Stability is a welcome sign to what has been an extremely volatile industry in recent months, but contractors, producers and operators alike are all waiting for the next step of price recovery. When that step occurs, however, cannot be determined. Petrello and his colleagues at Nabors are cautiously optimistic. “We are not counting on a V [shaped recovery], and all the plans we’re making is for an extended period of rebound,” he said. “We think by the end of the summer, things should sort themselves out, but we don’t see a quick read this year… So, I would say, [this will last] well into next year.”

Important disclosures: The information provided herein is believed to be reliable; however, EnerCom, Inc. makes no representation or warranty as to its completeness or accuracy. EnerCom’s conclusions are based upon information gathered from sources deemed to be reliable. This note is not intended as an offer or solicitation for the purchase or sale of any security or financial instrument of any company mentioned in this note. This note was prepared for general circulation and does not provide investment recommendations specific to individual investors. All readers of the note must make their own investment decisions based upon their specific investment objectives and financial situation utilizing their own financial advisors as they deem necessary. Investors should consider a company’s entire financial and operational structure in making any investment decisions. Past performance of any company discussed in this note should not be taken as an indication or guarantee of future results. EnerCom is a multi-disciplined management consulting services firm that regularly intends to seek business, or currently may be undertaking business, with companies covered on Oil & Gas 360®, and thereby seeks to receive compensation from these companies for its services. In addition, EnerCom, or its principals or employees, may have an economic interest in any of these companies. As a result, readers of EnerCom’s Oil & Gas 360® should be aware that the firm may have a conflict of interest that could affect the objectivity of this note. The company or companies covered in this note did not review the note prior to publication. EnerCom, or its principals or employees, may have an economic interest in any of the companies covered in this report or on Oil & Gas 360®. As a result, readers of EnerCom’s reports or Oil & Gas 360® should be aware that the firm may have a conflict of interest that could affect the objectivity of this report.


Important disclosures: The information provided herein is believed to be reliable; however, EnerCom, Inc. makes no representation or warranty as to its completeness or accuracy. EnerCom’s conclusions are based upon information gathered from sources deemed to be reliable. This note is not intended as an offer or solicitation for the purchase or sale of any security or financial instrument of any company mentioned in this note. This note was prepared for general circulation and does not provide investment recommendations specific to individual investors. All readers of the note must make their own investment decisions based upon their specific investment objectives and financial situation utilizing their own financial advisors as they deem necessary. Investors should consider a company’s entire financial and operational structure in making any investment decisions. Past performance of any company discussed in this note should not be taken as an indication or guarantee of future results. EnerCom is a multi-disciplined management consulting services firm that regularly intends to seek business, or currently may be undertaking business, with companies covered on Oil & Gas 360®, and thereby seeks to receive compensation from these companies for its services. In addition, EnerCom, or its principals or employees, may have an economic interest in any of these companies. As a result, readers of EnerCom’s Oil & Gas 360® should be aware that the firm may have a conflict of interest that could affect the objectivity of this note. EnerCom, or its principals or employees, may have an economic interest in any of the companies covered in this report or on Oil & Gas 360®. As a result, readers of EnerCom’s reports or Oil & Gas 360® should be aware that the firm may have a conflict of interest that could affect the objectivity of this report.