During 2016, less money will be invested in the North American land rig fleet than during any year in the past decade. With 1,100 rigs sitting idle in the US, it should come as no surprise that reinvestment in land drilling is falling off the cliff. But the magnitude of the capex cut is worth noting, and its extent is startling.
All of the major land drillers plan to take their newbuild programs close to zero during 2016, and they will only invest the bare minimum required to maintain their existing fleets.
In the chart below, we added up the spending programs of four large onshore drillers and charted this spending over time. These four companies plan to more than halve their capex y/y in 2016, chopping $2 billion out of their combined budgets. The 2016 investment will be about a quarter of what these companies were spending per year during the heat of the US oil boom.
Patterson-UTI spent over $1bn on fleet expansion in 2014 but does not expect to build any new rigs next year. Management recently said: “We currently expect capex in 2016 will primarily consist of maintenance capital, in which case we expect CapEx would be less than $200 million next year.” From $1 billion to under $200 million in two years is the definition of slamming the brakes. Patterson’s peers plan similarly draconian cutbacks.
Weekly North American Rig Count Statistics
The North America rig count fell 10 units last week, with the biggest hit coming in US vertical oil drilling. With the US benchmark oil price stuck in the mid-$40s, we continue to believe the drilling outlook is skewed negative over the next 3-6 months.
As 2015 budget dollars begin to run out in 4Q, we expect drilling activity to stall over the next couple of months. If our estimate of a 20%+ drop in 2016 NAM E&P spending proves correct, rigs may continue to trickle into yards during 1H16 depending on how deep 4Q cuts get (deep 4Q cuts would mean some sort of bounce back in 1Q16).
While the weekly figures will ebb and flow, the recent leg down in oil prices jeopardizes stability, and the rig count trough that has recently been established (in the 800-850 range) has now been broken and we are stepping down again. We expect the 700 level to be broken before the year is over.
In Canada, the rig count fell 6 rigs to 185 for the week, but this seasonally strong period is tracking well below recent years.
A regional summary of rig counts by key basins is below. With 232 rigs working, the Permian is still the most active basin, and it was up 3 rigs on the week. The Eagle Ford, with 72 rigs running, is the second most active basin, and it was down 3 last week. With 64 rigs running, activity in the Bakken was up 1 rig last week.