By Alex Endress, Editorial Coordinator
It’s been approximately 20 months since the downturn began, and uncertainty persists over how much longer the market will remain depressed. Dayrates are down by approximately 40% on average, and many contractors are operating on negative margins. Some have even been pushed out of the market altogether, Mike Garvin, Senior Vice President, Operation Support at Patterson-UTI, said at the 2016 IADC Asset Integrity and Reliability Conference on 31 August in Houston. “Back at the peak, there were 171 drilling contractors operating at least one rig in the United States. Today, we’re at 87, so half of the drilling contractors have quit working over the last two years,” he said.
Operators have been severely stressed, as well. In November 2014, there were 527 E&P companies utilizing at least one rig in the onshore US, but that number has since dropped to 163. Many of these are new players looking to take advantage of low prices. “We’re getting queries every day from customers we’ve never even heard of. It is a lot of private equity and just people coming in and finding opportunities. The whole customer base has changed,” Mr Garvin said.
Despite the market consolidation for operators, there is still steady demand for rigs in the US, albeit at lower prices. A total of 135 rigs were put back to work in the past three months, Mr Garvin said. “People are cherry-picking the spots where they can make money at the current price of oil,” he said. “The interesting thing about US land, if you look at a geographical map and you look at the basins, it is like a shopping cart. You could pick a breakeven price for oil, then you can find somewhere on that map where you can find that breakeven.”
Although increasing rig demand is certainly welcome, it will take some time before there is enough demand to give drilling contractors back the pricing power necessary to grow margins. “It is a buyers market. People are borrowing money to upgrade rigs and put them back to work at very low margins,” Mr Garvin said. “They are betting on the (rebound), which I think is a pretty safe bet.”
Mr Garvin also pointed out that drilling contractors have historically seen a spike in safety incidents when drilling rigs go back to work after downturns – something he hopes the industry can avoid this time around. “The process we generally use to reduce workforce during a downturn is to keep the best. Then, when we start putting rigs back, we start introducing new people. In the past, we have expected these people that we’ve kept – our best people – to keep the new people safe,” he said. “It doesn’t always work very well. In fact, it never really works well.”
The drilling contractor community has a moral imperative to avoid such an increase in safety incidents, and to do that, companies must use new strategies. “We’ve got to control this and not let this happen again. The key in controlling this is you’ve got to have systems and processes in place that keep everybody safe,” Mr Garvin said. “You’ve got to audit these systems and processes to make sure they are working. When you’ve got new people, you just introduce them into the process, and the process keeps them safe.”