Drilling Rates Rising with Market

Drilling companies are poised to take advantage of the largest drilling market in the world — the U.S. land drilling market.
Helmerich & Payne Inc., a Tulsa-based deep driller, has experienced tremendous growth in the last three years as the energy markets exploded.
In the past 18 months, H&P has announced customer-sponsored commitments to build an additional 66 of its cutting-edge Flex Rigs. Once those orders are filled, the contract driller will have a U.S. land fleet of 155.
Another Tulsa-based drilling company, Unit Corp., is focused on natural gas and seeing phenomenal growth, like most drilling companies across the country.
Recent statistics reveal that 88 percent of all U.S. land rigs are drilling for natural gas, said David Merrill, Unit CFO.
“We are long-term bullish on natural gas. The evidence of the cycle we are in shows the strength of the market,” Merrill said.
The U.S. market is the largest in the world, “and most attractive, given current dayrates, margins and returns,” said Juan Pablo Tardio, manager of Investor Relations at Helmerich & Payne.
The U.S. has about 70 percent of the world’s active land natural gas rigs, which is about 1,400 out of 2,800 worldwide.
H&P has been able to take advantage of market conditions.
“What we’ve done in the last decade is enter the main stream,” Tardio said. “The great success of the Flex Rig in the medium market segment has opened up opportunities in a shallower (drilling) segment.”
Average day rates for H&P have soared since the first quarter of 2003.
“We expect dayrates and margins to flatten out,” Tardio said. “We’ve seen that in this recent quarter. Nevertheless, we also expect our FlexRig construction program to generate substantial incremental earnings as the 66 new rigs are deployed by 2007,” he said.
It is one reason Unit’s day rates for its rigs are up 154 percent from the depths of the last downturn in the first quarter of 2003. Unit’s rates during the second quarter this year averaged $18,588 — compared to early 2003 when the rates averaged $7,317, Merrill said.
While natural gas prices have declined this summer, a harsh winter could drive prices up, he said.
“Keep in mind, while we are talking about natural gas prices being ‘down,’ that is down from $10 to $11 last November, and $6 to $7 prices are not bad historically,” he said.
Spending trends on E&P continues to climb.
While production is struggling throughout the U.S. market, demand is expected to increase, Tardio said.
Even with more than twice the number of rigs drilling for natural gas today, maturing fields and steeper production decline curves per well have contributed to a decrease in production levels in the last four years. While the Energy Information Administration reports a significant natural gas in production decline in the Gulf of Mexico since 2002 (www.eia.doe.gov), U.S. onshore production has slightly increased. Total U.S. natural gas production is expected to increase the rest of the year.
The overwhelming majority of wells in the U.S. are drilling for natural gas — but oil is driving the global market.
H&P has seen some production decline in the Gulf of Mexico; land drilling has seen a slight increase in production per day.
Market demand for the rigs continues to be strong and H&P expects an extended up cycle, Tardio said.
“Nevertheless, many investors are concerned about the consequences of a possible economic recession, the volatility of natural gas prices and the possible injection of too many incremental rigs during the last couple of years,” he said.
Unlike the recent past, there does not appear to be a downturn, Merrill said.
Unit is reaching a milestone this year, estimating to have 119 rigs in its fleet by the end of the year — including the addition of eight rigs this year, Merrill said. ?

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