New orders for land rig building continue even amid the recent drop in oil prices, and analysts and drillers insist that industry's appetite for new state-of-the-art drilling units has not been slaked.
Big land drillers Patterson-UTI and Nabors said during respective third-quarter earnings calls this week that they have each contracted several newbuild rigs in the past three months.
Patterson inked deals for seven of its trademark APEX rigs and Nabors for three of its new PACE-X brand rigs for US work in the Eagle Ford Shale of South Texas and the Tuscaloosa Marine Shale of Louisiana/Mississippi. The Tuscaloosa is an emerging but fast-developing play where industry continues to work out early-stage problems relating to the depth, pressure and optimal drilling zones of the reservoir.
Not only are drillers still inking deals with upstream operators for newbuild rigs, particularly for US use, but customers continue talking about potentially constructing more of them, drilling executives said.
"Even over the last month, we haven't seen any change in flow of customers who have either wanted to come to our new construction yard or go out to the field to visit rigs and look at rigs," Patterson-UTI CEO William Andrew Hendricks said during an earnings call Thursday. "So we're just not seeing any indications right now of any change."
Moreover, Patterson's newbuild contracts continue to be signed for an average "very close" to three years, Hendricks said. For any lesser period, "customers were willing to pay a premium ... so this is still a market where we're getting good terms, and we still think we'll continue to push pricing on APEX rigs," he said.
Patterson now has 30 newbuilds that it expects will be constructed roughly between now and the end of September 2015, Hendricks said.
In addition, Nabors appears to be close to signing more deals, company CEO Anthony Petrello suggested in Nabors' call on Wednesday.
"We are in advanced negotiations with multiple customers for additional [PACE] X-rigs," he said.
Petrello also said Nabors is gearing up for more build capability.
"We're on track to increase the build capability of our [PACE] X-rig newbuild program" starting in 2015, he said. "In light of the current outlook for the Lower 48 rig market, we expect to reach four X-rigs per month sometime during the first quarter."
This plan is backed by "strong customer demand for PACE-X rigs in line with the expansion of multi-well planned activity," he said.
Analysts noted that the pace of newbuilds has slowed a little recently.
"But [that is] only because the land rig companies have basically sold out most of 2015," International Strategy & Investment Group analyst James West said.
For example, Patterson in Q2 signed 19 contracts for new APEX rigs, while Nabors inked deals for eight new PACE-X rigs to be used in the US in the same time frame.
And upstream operators are still not slowing their drilling programs and likely will not slow down for the rest of the year, except for typical holiday slowdowns from late November to the end of the year, West said.
"If we are closer to $80/b, we could see the rig count decline somewhat in 2015," he said.
On Friday, 1,872 land rigs were working in the US, according to Baker Hughes' weekly rig count. That was up by 11 from 1,861 the previous week and is a nearly 3% increase from 1,820 rigs from early July, and up almost 6% from 1,771 rigs in early April.
In a recent report on the land drilling market, UBS analyst Angie Sedita said she believes the industry will need 250-400 new higher-specification drilling rigs over the next three-five years that are capable of pad drilling -- that is, drilling multiple wells from a single "pad" or defined drilling space.
"Underlying industry fundamentals due to US unconventional [plays] are ... positive and the demand for pad-capable rigs will grow," Sedita said.
West believes "at least" 600-700 more land rigs are needed to replace older mechanical rigs that are now drilling horizontally.
Pad drilling is gaining favor as more efficient because it avoids having to shut down and move rigs from one well site to another. Nabors' third-quarter presentation said 20% of its customers employed pad drilling in 2010 and 50% in 2013, and estimated 70% will use it in 2018.
Moreover, the average number of wells per pad is growing, the presentation said: from 2.2 in 2010 to four in 2013 and an estimated "six-plus" in 2018.
Currently, 25% of the US rig fleet can handle multi-pad and "multi-row" drilling (so-called "walking" rigs), Sedita said, compared with 36% of rigs that are higher-specification but only capable of single-row pad drilling. The remaining 42% of current US rigs, or around 800, are older legacy rigs.
Eventually, 30-50% of the US land rig fleet's legacy rigs will be replaced by newer, more capable rigs, Sedita projected.
"Ultimately as newbuild land rigs are delivered, we expect dayrates to flatten out (likely early 2015) and for the newbuilds to replace the legacy rigs (likely mid-2015)," she said. But "we still expect modest growth in average dayrates and rig margins as the newer rigs earn higher relative pricing."
