Large U.S. onshore drilling firms that operate new, faster rigs are best placed to weather the looming downturn brought by slumping crude prices and could gain market share from smaller drillers with considerable debt and outdated equipment.
Drillers are trimming rental rates for rigs and idling older machines as their clients, oil producers, slash 2015 spending.
Analysts say companies with considerable debt such as Nabors Industries Ltd and small private firms with less efficient rigs will scramble to keep them in operation. In contrast, those with new rigs, such as Helmerich & Payne Inc , will have more leeway to negotiate lower rates with producers and keep or even expand their business.
Rig rates of $25,000-$30,000 per day in the quarter ended Sept. 30, are expected to fall 20-25 percent or more next year and talks over lower rates are already underway, analysts said.
Capital One Securities said 600-800 rigs could be pulled out of service “with crude in the $50s.”
About 28 U.S. land rigs were pulled out of service last week according to Baker Hughes, leaving the industry with 1820.
Even with fewer rigs, the U.S. government expects oil production to increase next year thanks to rising well productivity.
BIG VS SMALL
The top three to four players had 65-70 percent of the most modern rigs and the oil slump gives them a chance to win market share from small firms that make up about half of the U.S. land drilling sector, RBC Capital Markets analyst Kurt Hallead said.
Helmerich and its rival Patterson-UTI Energy Inc offer investors less risk because their low debt levels allow them the flexibility to cut rates and stay in the business, analysts say.
Helmerich has a debt-to-EBITDA (earnings before interest, tax, depreciation and amortization) ratio of less than 1, Patterson’s is 2.3 while Nabors is 7.4. Helmerich and Patterson’s shares are down by about half since June while Nabors is down nearly two-thirds.
Some think Helmerich shares are oversold.
“(HP’s shares) are pricing in a very significant downturn that we are not seeing happening just yet,” said Christian Greiner, a portfolio manager at Azzad Ethical Fund.
Helmerich, which has a large fleet of more efficient rigs with alternate current motors, is expected to hold steady or win more contracts through the slump.
“H&P has a stable of world-class oil company customers who have been happy so far to sign multiple year contracts, all of which will stay in force, I believe,” said Richard Spears, vice president at oilfield consulting firm Spears & Associates.