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Shale drillers brace for headwinds as activity slows

Contractors prepare for soft market as E&P players focus on returning cash to investors

Rig contractors working in the shale basins of the US expect a soft services market to get even softer amid a volatile commodity price environment and as exploration and production companies tighten their belts and focus on returning cash to investors.

Activity is slowing at a quicker than usual pace, as producers are anxious not to exhaust their budgets before the year is out, Patterson-UTI chief executive Andy Hendricks said last week.

"Historically, E&P companies would slow activity in the fourth quarter if they had reached the point of budget exhaustion, but this year operators seem to be slowing the spending run rate much sooner so as to avoid reaching the point of budget exhaustion which would put them at risk of exceeding their budget," Hendricks said on the company's second-quarter earnings call.

"The slowing of the spending run rate is expected to lead this to lower levels of drilling and completion activity in the third quarter."

Patterson-UTI's rig count averaged 158 during the second quarter and is expected to drop to an average of 142 in the third quarter. The company averaged 175 rigs in the first quarter of 2019.

Hendricks said it was not yet clear how the anticipated drop would affect dayrates, though he noted pricing was under some pressure as a result of a lower-than-expected rig count.

Another land driller, Helmerich & Payne, saw its rig count drop more than forecast in the second quarter. The company exited the quarter with 214 rigs, below the low end of its guidance.

"Our expectation of the company’s rig count reaching the bottom during the quarter turned out to be premature," chief executive John Lindsay said.

The company was running 207 rigs in the US during its earnings call last week and expects to exit the third quarter with between 193 and 203 active rigs.

Precision Drilling's average rig count also fell, from 79 in the first quarter to 77 in the second.

The company had 73 active rigs working in the US as of its investor call last week, chief executive Kevin Neveu said. "E&P operators will continue to carefully manage spending," he said on the call.

"Industry activity may further soften, but the focus on drilling efficiency will continue," Neveu added.

While drillers are preparing for the headwinds, they also see green shoots in demand for "super" high-specialisation rigs that are suited for carrying out the large-scale, efficient operations shale producers seek.

Hendricks noted that utilisation for Patterson-UTI's super-spec Apex rigs was "relatively high", adding that conventional rigs were more likely to be released.

"By the end of the third quarter, we expect that our active fleet in the US will be comprised solely of Apex rigs," Hendricks said.

Meanwhile, utilisation of Precision's 68 Super Triple rigs was above 90%.

"We expect sustained firm demand for Precision's performance-leading Super Triple rigs and expect stable pricing and activity trends... will continue for the balance of the year, of course assuming commodity price volatility does not widen," Neveu said.

For H&P's part, utilisation of its Flex Rig fleet was close to 90% in the second quarter.

"Even as activity trends lower, we continue to see persistent demand for top-performing rigs that are required for more complex wells," Lindsay said.

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