With 2009 in the books, we are taking a look at the year behind us in the rig market and providing thoughts and forecasts for the onshore rig market in the year ahead. This is the fifth installment in a series of articles which review 2009 and preview 2010 for the jackup, floater and land rig markets.
After drilling contractors posted record levels of earnings in the upcycle from 2004-2008, 2009 marked the beginning of an earnings descent likely to continue over the next year or two for many drilling contractors. When E&P spending and activity levels were curtailed in 2009, rig utilization and leading edge dayrates followed. For the drilling markets, 2009 was in many respects a transition period as market participants adjusted to a new reality defined by lower commodity prices, rig demand, dayrates and utilization. In the second half of 2009, some positive developments have emerged in most rig markets as crude oil prices have recovered materially off their lows, and the broader economy appears to have stabilized. In the report below, we review 2009 for the land rig market.
2009 U.S. Land Rig Market Review
With the pull back that began in 3Q2008 carrying into 2009, the first half of the year continued one of the largest rig count declines in the industry's history.
However, after 2009 "half-time", the land rig market began to stage a comeback, with the rig count growing and multiple positive indications emerging in the back half of the year. While the U.S. land rig count today (1,139) remains significantly below year ago levels (1,547) and the 2008 average (1,790), the rig count is now about 40% above the bottom in early June 2009 and almost back to February 2009 levels.
Along with the empirical recovery observed in the rig count, anecdotal evidence supporting the recovery in rig demand has emerged. Commentary from land drilling company management teams in late-2009 has been positive, with contractors noting the strength of land rig demand in shale plays like the Haynesville and Marcellus and increased inquiry levels across multiple markets. Although pricing leverage still lies with operators given the idle capacity on the sidelines, leading edge dayrates appear to have stabilized in most markets for now, and in some cases, small increases have been noted. Additionally, long-term contracts have been signed in the back half of 2009 for some newbuild rigs, and after a hiatus in the early part of the year, it appears that the spot market for available rigs has returned.
In 2009, market share changes favored those contractors with higher concentrations of high spec rigs. Among the large public contractors that Rigzone tracks, Helmerich & Payne was the biggest beneficiary of this development, averaging 2% higher market share in 2009 year-over-year, while Patterson-UTI averaged 6% less market share over the same period. However, in the final quarter of 2009 Patterson-UTI made some significant rig count increases. Given relatively strong rig demand in emerging shale plays, which generally require higher horsepower rigs than the conventional plays, contractors with higher spec drilling rig fleets have fared better than those with higher concentrations of lower spec units. That said, in late-2009, quite a few lower spec rigs have returned to work on a spot basis as operators looked for low cost approaches to monetize the commodity price recovery.
A Differentiated U.S. Recovery
While the rig count has recovered nicely in 2H2009, the rebound has been bifurcated in two primary ways; oil drilling activity has exceeded natural gas drilling activity and horizontal drilling activity has exceeded vertical drilling activity.
With crude oil prices rallying more than 75% in 2009 while natural gas prices finished the year about flat, oil drilling activity has been the primary demand driver behind the land rig market recovery in the second half of 2009. In fact, since the June land rig count bottom, the oil rig count has more than doubled while the natural gas rig count is up only about 10%. Today, for every U.S. rig drilling for oil, there are approximately two rigs drilling for natural gas, which is the lowest level for this ratio in more than a decade.
In 2009, what is likely a secular variation in land drilling activity continued to develop, as the horizontal rig count continued to rise as a percentage of the total rig count. Driven by a heightened focus on developing shale play acreage, the shift away from vertical drilling toward horizontal drilling has become empirically visible over the last several years. This trend was not only limited to the recovery phase in 2H2009; the horizontal drilling allocation increased significantly during the pullback as vertical and directional drilling activity levels suffered larger declines. In fact, in 35 of the last 52 weeks, the weighting of horizontal rigs in the total U.S. rig count has increased. In the chart below, the average rig count by drilling type is shown over the last several years demonstrating the rise in "market share" of horizontal and directional drilling rigs at the expense of vertical drilling rigs. In 2004, horizontal drilling activity only comprised about 10% of the rig count compared to almost 50% today. Look for the secular shift toward horizontal drilling to continue as the next cycle unfolds and more rigs are deployed in unconventional plays.
For more details on the recent U.S. land rig downturn and the ongoing recovery, please refer to the Rigzone Land Rig Review series.
2009 International Land Rig Market Review
On the international front, the land rig count held up much better overall in the downturn than did the U.S. rig count. However, the overall international rig count (measured by the sum of the rig count in the major markets tracked by Baker Hughes) still stands below year ago levels and fell approximately 16% in the downturn. So far, the international land rig count has recovered approximately 8% from the bottom.
Digging deeper into the regional sectors comprising the international rig count reveals that some markets have held up much better than others. Asia Pacific, which currently accounts for almost 20% of the international land rig market tracked by Baker Hughes, only fell by 8% in the downturn and has subsequently recovered to match its 2008 peak. However, a different story played out in Europe and the Middle East, as the rig count in those regions fell by 45% and 21%, respectively. In the recovery, the European land rig count has recovered 33%, while the Middle Eastern rig count is up about 9%. The table below presents regional rig count statistics for key international land rig markets.
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