Sub-$50 Oil Has U.S. Shale Producers Cutting Rigs Loose Early
U.S. oil producers are bailing out of long-term contracts for drilling rigs as crude prices sink below $50, another signal that the nation’s shale boom is slowing.
Helmerich & Payne Inc. (HP), the biggest rig operator in the U.S., this week said it had received early termination notices for four contracts. Yesterday, a second contract driller, Pioneer Energy Services Corp. (PES), said four rigs had been canceled early. Producers may cut short another 50 to 60 agreements, according to Bloomberg Intelligence analyst Andrew Cosgrove.
Companies are paying to cancel rigs rather than keep drilling in the face of a 55 percent plunge in prices. Mounting rig cutbacks imperil the unprecedented boom in U.S. output that’s contributed to a global glut of oil and helped sustain a price war among the world’s largest suppliers.
“This is just the beginning,” R.T. Dukes, an upstream analyst at Wood Mackenzie Ltd., said by telephone from Houston. “Even the best of the best who continue drilling have balance sheet constraints when you get oil this low. It might make sense to just terminate these contracts and not do anything and wait for a better day.”
U.S. benchmark West Texas Intermediate oil rose 36 cents, or 0.7 percent, to $49.15 a barrel in electronic trading on the New York Mercantile Exchange at 1:14 p.m. Singapore time. Brent, the global benchmark grade, added 27 cents to $51.23.
New Rigs
Contracts for the 190 rigs that on-land drillers were expected to add this year, known as newbuilds, have the highest risk of being terminated, Cosgrove said by telephone from Princeton, New Jersey. Helmerich & Payne had contracts for 37 newly built rigs terminated early after the last oil rout in 2008, he said.
“Looking back at what happened in 2008 and 2009, I’d feel comfortable saying there’s definitely going to be upwards of 50 to 60 early cancellations,” Cosgrove said.
Terminations aside, less than half of land drillers’ rigs are on term contracts through 2015, data compiled by Bloomberg Intelligence show. Pioneer may be the most exposed, with 75 percent of its fleet up for renewal in the next three quarters, according to the data.
Ensign Energy Services Inc. (ESI) may lay off as many as 700 workers across Kern County and Long Beach, California, after an “early and unexpected termination” of drilling contracts, the company said in a Dec. 18 letter to the state’s Employment Development Department. The Calgary-based field services company was forced to halt production on a number of drilling rigs in California, according to the letter.
Terminations Cheaper
Helmerich & Payne, based in Tulsa, Oklahoma, said in a presentation Jan. 7 that spot pricing for its FlexRig is down 10 percent and the company expects to see 40 to 50 of the rigs idled in the next 30 days. San Antonio-based Pioneer Energy Services said yesterday it would receive about $17 million in termination payments for the four rigs being canceled effective this quarter.
“In a lot of the long, horizontal plays, oftentimes a rig termination clause is equal to the cost of one well,” Dukes said. “Terminating these contracts is really relatively cheap compared to drilling these $10 million wells over and over and over again.”
Sub-$50 Oil Has U.S. Shale Producers Cutting Rigs Loose Early
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