Dec 20 A new generation of land-based oil and
gas rigs is halving drilling time and cutting costs for
customers, but also setting a clear divide for investors between
firms that have the new machines and those stuck with hundreds
of old ones.
About two-thirds of the 1,750 active land rigs in the United
States are legacy diesel-powered units. The rest are the newer
machines that have alternate current (AC) motors.
Driller Helmerich & Payne Inc, which dominates the AC
rig market with a share of about 40 percent, is the biggest
beneficiary of the move towards more efficient equipment and is
enjoying much higher operating margins as a result.
In contrast, drillers such as Nabors Industries Ltd
and Patterson-UTI Energy Inc face scrapping many old
rigs as there are few buyers for them.
Fleet upgrades are costly -- new rigs can cost anywhere from
$10 million to $50 million -- and phase-outs of older rigs will
result in writedowns. But drillers can't afford to stand still,
analysts said, as gas and gas liquids prices are expected to
stay depressed, making cost cuts crucial for energy producers.
"Smaller companies have sold older rigs for little more than
salvage value, while larger companies have been hanging on to
them since they haven't needed cash as much," said Tim Parker,
who manages T. Rowe Price's natural resource stock portfolios.
Shares in Helmerich, whose customers include Occidental
Petroleum Corp, Marathon Oil Corp and Devon
Energy Corp, have jumped 22 percent in the past six
months, and analysts and Thomson Reuters data suggest there is
potential for further gains.
Based on Thomson Reuters' StarMine Analysts Revision Model
(ARM), a measure of change in analyst sentiment, Helmerich ranks
highest among its peers. Helmerich's ARM score is 88 out of
100, compared with 4 for Nabors. Patterson-UTI has a score of
GRAPHIC-New rigs, good margins r.reuters.com/ryh74t
GRAPHIC-Fewer rigs due to weak gas r.reuters.com/dyb62s
Nabors and Patterson-UTI are also seeking more efficient AC
rigs, a development that is expected to send most of their older
rigs out of service in the next few years, analysts said.
"It seems unlikely there will be much of a market for older
rigs, so ultimately I'd expect them to be scrapped," said Philip
Weiss, a senior energy analyst with Argus Research in New York.
Some 300 older rigs are already lying unused in North
America, made even more uncompetitive by falling gas and gas
liquids prices that have cut overall drilling activity.
The U.S. land rig count has fallen 11 percent from a year
ago, according to data compiled by Baker Hughes Inc.
Helmerich's operating margin is twice that of Paterson-UTI
and nearly eight times that of Nabors, but its advantage will
gradually erode as rivals take delivery of about 50 new rigs
There are currently about 600 new-generation rigs working in
the United States.
Precision Drilling Corp, Canada's largest oil and
gas drilling contractor, said earlier this month it would
decommission 52 of its older rigs and take a related charge of
up to C$200 million ($203 million)in the fourth quarter.
"While some legacy tier-3 rigs may have market niche
opportunities, the drilling industry's growth and success will
be driven by improved drilling efficiency, safety performance
and environmental responsibility," Chief Executive Kevin Neveu
RUSH TOWARDS EFFICIENCY
"Older rigs are going to have an increasingly difficult time
being competitive/finding work as we go forward," said Argus
The preference for more efficient rigs has particularly
helped Helmerich, which has a market value of about $6 billion.
The 22 percent jump in its shares over the past six months
is more than twice the 9 percent gain in the Thomson Reuters
United States Oil & Gas Drilling Index, which
includes both onshore and offshore drillers.
Helmerich's stock has room to rise further, investors and
analysts say, as the company's 250 high-specification AC rigs
give it an edge over rivals.
"While others are also building new rigs, HP went in this
direction sooner and more fully than its peers, allowing most of
its fleet to be modernized and enjoy higher utilization and
margins," said T. Rowe's Parker, whose firm had investments in
Nabors, Helmerich and Schlumberger Ltd as of Sept. 30.
More than 80 percent of Helmerich's fleet is made up of AC
rigs, which the company says can save up to 38 percent on
drilling costs per well despite commanding daily rates that are
up to 20 percent higher than those for conventional rigs.
About 37 percent of Nabors rigs are AC units while a third
of Patterson-UTI's fleet is made up AC machines.
"We will continue on a two-rig-per-month build program to
get us to 126 APEX (high-specification) rigs by the middle of
next year," CEO Andy Hendricks said in a presentation this
month. The company had 107 of those rigs as of Sept. 30.
Helmerich makes its own rigs but others rely heavily on
National-Oilwell Varco Inc, the largest U.S. oilfield
equipment maker, so it also stands to benefit from the new
Shares of the equipment maker, which has posted
better-than-expected results for the last six quarters, have
risen nearly 5 percent in the past year. Its backlog of rig
orders, both onshore and offshore, rose 13 percent in the year
to Sept. 30 to $11.7 billion.
Patterson-UTI declined comment for this article, while
Helmerich pointed to its presentation on its rig fleet. Nabors
did not respond to emails seeking comment.
($1 = 0.9869 Canadian dollars)
(Additional reporting by Swetha Gopinath; Editing by Rodney
Joyce and Ted Kerr)