Next week Texas auctioneer Kruse Asset Management will put two unused, top-of-the-line drilling rigs under the hammer.
The towering structures designed to bore oil and gas wells are on offer for fire sale prices. Valued at $40mn and $30mn when built in 2019, their respective starting bids will be $12.9mn and $2.3mn.
“There’s no reason for them to be so cheap, but there’s just no demand,” said Dan Kruse, chief executive of the San Antonio-based auctioneer, who has been selling oilfield equipment for four decades.
An oversupply of equipment is a stark sign that drilling in US shale energy regions is levelling off, as producers respond to lower commodity prices and pressure from Wall Street to direct spare cash to shareholders.
After slowly climbing since the depths of the coronavirus pandemic, the number of oil and natural gas rigs at work in the country has declined 6 per cent since the beginning of the year to 731 last week, according to Baker Hughes, the oilfield services company. Almost 2,000 rigs were running in the middle of 2014, when the shale revolution was at a peak. Last week the number of gas-directed rigs dropped by 16, or 10 per cent — the steepest weekly fall since 2016.
“Today’s operators are more discerning than ever before,” said Matt Johnson, chief executive of Primary Vision, an energy data company.
Johnson said producers that received a windfall from last year’s oil and gas rally were watching oil prices before hiring new drilling crews. “The overall economy is still in a state of cautious uncertainty and upstream participants are paying attention.”
At the same time, more private companies that accounted for much of the modest increase in shale drilling activity last year have been acquired by cash-rich public companies, which are under greater scrutiny over returning cash to shareholders.
“They had really been the growth engine,” said Nathan Nemeth, an analyst at Wood Mackenzie, a consultancy. “Now those privates are being bought and taken out and the trend has been a slowdown in growth.”
Recently, New York-listed Matador Resources snapped up private equity-backed Permian basin driller Advance Energy for $1.6bn, while the public company Ovintiv bought $4.3bn worth of assets from Encap Investments last month.
US crude oil and dry gas production are on track to make annual records this year, according to the Energy Information Administration. But as drilling hits a plateau, growth is decelerating.
US oil output soared by more than 1mn barrels a day each year between 2012 and 2014, with production hitting a peak of 13mn in November 2019. Analysts are scaling back forecasts, with the EIA saying production will rise by just 200,000 b/d over the next 12 months to 12.6mn b/d.
The productivity of wells has improved in recent years as companies sharpened their skills at breaking through shale resources. But it has begun to slide in some once-prolific regions such as the Bakken shale of North Dakota, where new oil production per rig rose from a little over 100 b/d in 2007 to more than 2,700 b/d in 2020, but has since declined to less than 1,700 b/d, according to EIA.
Weakening energy prices have accentuated the pullback in US drilling. US oil prices settled just below $71 on Tuesday, down more than 40 per cent since Russia’s full-scale invasion of Ukraine sent them above $120 last year. Benchmark US gas prices have fallen about two-thirds over the same period to a little over $2 per million British thermal units.
Publicly traded gas-focused producers including Chesapeake Energy and Comstock Resources — alongside a host of private companies — have indicated they will ease drilling in the Haynesville shale basin that straddles Texas and Louisiana this year.
“In terms of the gas markets, obviously, we have hit an air pocket here,” Anthony Petrello, chief executive of drilling contractor Nabors Industries, said on a recent earnings call. “When the end of March came along, a lot of those guys just hit the halt button.”
Like its competitors, Nabors has sought to move rigs from gas-focused basins to oil-focused plays such as the prolific Permian basin in west Texas and New Mexico. Rival Precision Drilling said on a recent call with analysts that it plans to shift rigs north of the border to Canada.
Many gas drillers are banking on the construction of new terminals to export liquefied natural gas, a promising sales outlet for domestic US gas producers. But these projects take years to come on line and no new projects are scheduled to start up until late 2024.
For Kruse, the auctioneer, that is too late. He said he is now looking beyond the “mushy” US market, seeking buyers based in Latin America and the Middle East.
“We’re marketing everywhere, but abroad is more realistic to find the buyer, I think — where more end users would be. Internationally is probably where the rigs will sell.”
‘Halt button’ hit on drilling in US oil and gas slowdown
