By OGJ editors
HOUSTON, July 13 -- The US land drilling rig count is moving higher, the land rig market is tightening, and market fundamentals indicate that day rates will improve later this year going into next year, said Raymond James & Associates Inc., St. Peterburg, Fla.
The Lubbock, Tex.-based Land Rig Newsletter recently reported 1,323 active US land rigs, 60 more rigs than in the peak achieved during industry's last big drilling upswing in July 2001. A recent Houston-based Baker Hughes Inc. rig count reported 1,111 US land rigs working, 16% above year-ago levels and 2% shy of the Baker Hughes count July 2001 peak level of 1,136 land rigs.
The US land drilling market is headed for "uncharted territory," RJA analyst Marshall Adkins said in a July 12 research note. "Relative to 2001, we are experiencing several driving factors that should support this upward trend, and separate this cycle from previous cycles."
Given a bullish backdrop of sustainable high commodity prices, Adkins believes that the US land rig count is experiencing a much more balanced utilization vs. pricing environment than it has experienced in the past.
Utilization vs. Price
"Rig operators have done a remarkable job at balancing supply just enough to meet demand, as compared to previous cycles. Specifically, the industry began the current cycle with 250-300 more rigs than it did the previous cycle, which has to date caused day rates to grow at a much slower pace for the same number of active rigs. However, given the continued consolidation and financially responsible nature of the largest drilling contractors, pricing has started from a much higher base this time around," Adkins noted.
Utilization has shifted upward to near 70% and is approaching the point at which the slope of the day rate improvement curve changed rapidly during the previous cycle, he noted.
"Additionally, we have recently heard reports that all but the two largest players are now nearly out of capacity, which bodes extremely well for the land drilling industry in general," he said.
Dayrates should be headed for higher levels throughout the rest of the year.
RJA forecasts a gradual day rate increase of $250-400/day for each quarter this year. "In other words, it appears that the day rates and margins are on track to increase the quarterly rate of change from the $200-$300 range to the $400-$500+ range within the next couple of quarters. Recall, it tends to take a full quarter for spot day rate changes to fully impact the financials of the drillers," Adkins said.
During 2000-01, day rates and margins rose by more than $1,000/day each quarter for several consecutive quarters in a row.
