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Contract Drillers Feeling Liquids Shift

Contract drillers Helmerich & Payne Inc. (H&P) and Patterson-UTI Energy Inc. are feeling the effects of producers' migration from dry gas to oil and liquids-rich drilling targets. Pressure pumping operations are facing market challenges, and rigs are getting more of a workout as deeper holes are being drilled more quickly, executives from the companies told financial analysts during earnings conference calls.

"In the current natural gas pricing environment, our customers in the Northeast seemed to be delaying well completions, which accentuated the problems arising from the oversupply of equipment in this market," said Patterson Chairman Mark Siegel with regard to the company's pressure pumping business. "The lower utilization, combined with some pricing erosion in the Northeast, negatively impacted our margins. But because of the strength in the Southwest, our overall gross margin percentage only fell by approximately 80 basis points, outperforming our internal expectations.

Patterson CEO Douglas Wall said the company's average U.S. rig count increased by four rigs during the period to 224, and in Canada the average rig count increased by one to 13. "In the U.S., the increasing rig count was facilitated by our broad geographic footprint, which allowed us to move 11 rigs during the quarter out of the dry gas market and into the oily and liquids markets, such as the Eagle Ford, Permian and the Bakken."

H&P CEO Hans Helmerich told analysts his company's rigs are working harder, causing some costs to increase for rig maintenance. "For example, from 2010 to 2011, our average footage per day increased over 10%," he said. "Already in 2012, we have seen average footage per day increase another 10%. So on one hand our performance continues to improve, but at the same time, simply more is being demanded from the rig."

Helmerich said H&P will manage its costs with a focus on improving efficiencies. "Going forward, we expect the average daily costs to flatten and trend slightly lower as some of the transitional issues run their course," he said, adding that only three of the company's 80 rigs that are in the spot market are drilling for dry gas and only another three of the dry gas-directed rigs under contract have their contracts roll off during the third quarter.

At Patterson, Wall said the company expects "the rebalancing of the rig market to continue, with additional rigs moving from dry gas to the oil and liquids market. With the movement of the rigs in the first quarter, we now estimate that approximately 68% of our rigs are drilling wells for oil or liquids-rich targets. This increased focus on oil and liquids markets, combined with our term contract coverage, has lowered our exposure to natural gas rigs in the spot market from almost 30 rigs last quarter to approximately 15 rigs currently."

South Texas continues to be the company's strongest market, Wall said. "The Eagle Ford [Shale] market has been inundated with frack equipment moving out of the Haynesville [Shale], and we believe this market is saturated with crews for the time being," he said.

In the Northeast, activity is declining, Wall said. "We do expect to see frack crews leave this market for oilier pastures over the course of the next few quarters," he said, adding that the expectation is the Marcellus Shale area market will be depressed until the industry sees some gas price recovery or activity picks up in the Utica Shale.

"We have sent some crews from the Northeast to work in Texas, thereby helping with the tight labor market in Texas and helping to alleviate some of the operational inefficiencies caused by lower utilization in the Northeast," Wall said. "We continue to believe in the long-term prospects of the Marcellus, but we will certainly consider moving our equipment and people to other markets where we can maximize utilization and generate the highest returns."

Houston-based Patterson reported first quarter net income of $97.3 million (62 cents/share), compared to net income of $71.3 million (46 cents) for the first quarter of 2011. Average revenue per operating day increased by $670 to $22,650, compared to $21,980 for the fourth quarter of 2011. Average direct operating costs per operating day for the first quarter of 2012 increased to $13,080 from $12,700 for the fourth quarter of 2011. Average margin per operating day increased by $290 to $9,570, compared to $9,280 for the fourth quarter of 2011.

Tulsa-based H&P reported second fiscal quarter operating income of $129.9 million ($1.18/share), compared to $99 million (91 cents) during the year-ago period. Income for U.S. land operations was nearly $210 million, compared with $164.3 million for last year's second fiscal quarter and $224.7 million for this year's first fiscal quarter. The sequential decline from the first quarter was mainly due to an increase in operating expenses, even though the segment's rig activity level and average rig revenue per day continued to improve during the second fiscal quarter of 2012, the company said.

Results for the H&P's offshore operations suffered from reduced activity and lower average rig margin per day. Income was $9.8 million for the second fiscal quarter, compared with $11.5 million for last year's second fiscal quarter and $12.2 million for this year's first fiscal quarter.

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