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Lower 48 Rig Market Digests Gas-to-Oil Transition, Says Nabors CEO

The Lower 48 land rig market has "digested" the transition to oil-directed drilling, but there's still an oversupplied pressure pumping market, brought about in part by efficiency gains, Nabors Industries Ltd. CEO Tony Petrello said Wednesday.

Executives discussed the third quarter performance during a conference call. The company is the largest U.S. onshore drilling fleet operator and the biggest supplier of pressure pumping equipment for oilfield service operators.

Although the market for new technology remains high, the completion services market, specifically pressure pumping, or hydraulic fracturing, "is less sanguine," said the CEO. That point was driven home by Halliburton Co.; management expects an oversupplied market through 2014 and perhaps into 2015 (see Shale Daily, Oct. 21).

Drilling efficiencies "exacerbate that oversupply, as seen in our own stage counts, which since the beginning of the year are up 28% in the northern region and 20% overall," said Petrello. The northern region is the Northeast. "This market continues to experience periodic bouts of aggressive pricing."

As such, Nabors is withholding "predictions of the timing of improvements in this market. That said, we believe the underlying profitability of some pumpers is insufficient to support a long-term presence in the market. In the near-term, we still see risk of an exaggerated end-of-year slowdown due to the rapid consumption of annual budgets by some customers."

The rapid turn by natural gas producers to oily targets in 2012 slammed oilfield service profits in 2012, as they moved equipment and crews. By the final quarter of 2012, many producers had exhausted their budgets, which in turn provided little work for the service operators (see Shale Daily, Jan. 28).

Different types of issues now exist in the U.S. onshore, and some are expected to impact Nabors into early 2014, said Petrello. For one thing, there are more of its technology savvy PACE-X rigs moving into basins. Another are pressure pumping contracts that begin to fall off.

"In the U.S. Lower 48 market, we anticipate additional rig deployments as we continue to roll PACE-X rigs into the field," Petrello said.

Nabors has six PACE-X working rigs in the Lower 48, with 23 more scheduled to be deployed on long-term take-or-pay contracts into mid-2014. Once they go into the field, Nabors would have PACE-X rigs in every major shale basin the United States, said the CEO.

However, "while a few initial PACE-X rig deployments have gone to the Haynesville and Marcellus, we do not believe those represent an uptick in gas-directed drilling at this point."

The U.S. onshore fleet now includes 111 rigs equipped with moving systems for pad drilling. Of those, 79 have walking systems and another 32 have skid systems.

"With the PACE-X rigs now in the queue on planned upgrades, we anticipate 151 of our rigs will be pad-capable and 119 will have multidirectional walking system...We see operators continuing to increase a portion of their wells that are drilled on pads with more than two to three wells," said Petrello.

"Moreover, the number of wells per pad is growing, and we are seeing a high occurrence of pads configured for multiple rows of wells as we have seen in the Bakken. This change includes the Texas market, where currently two well pads -- two wells per pad is the norm, with an occasional three-well pad. Our PACE-X rig, with its structural designed walking system, is tailor-made for multi-row pad geometries.”

The last remaining take-or-pay contracts for Nabors' pressure pumping services are rolling off in 1Q2014, Petrello said.

"When we view, however, our business through these outlooks, we conclude that the markets for our drilling rigs are generally improving. The underlying trends, specifically in drilling and rig services, are mostly constructive with pockets of challenges..."

In the U.S. drilling segment, Lower 48 rig years totaled 179 at the end of 3Q2013, up three sequentially.

"It proved tougher than we expected to put the rigs back to work during the quarter, mainly in light of the significant changes in drilling plans by a few notable operators," said the CEO. "We expect Lower 48 rig years to increase modestly in the fourth quarter."

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