Next week, two pristine drilling rigs, valued at $40 million and $30 million respectively when constructed in 2019, are set to go under the hammer at a Texas auction by Kruse Asset Management. The starting bids have been set at a staggeringly low $12.9 million and $2.3 million, reflecting the current low demand for such equipment.
Dan Kruse, CEO of the San Antonio-based auctioneer with four decades of experience in oilfield equipment sales, notes the extraordinary discount. He suggests it is indicative of a broader trend: drilling in US shale regions is stabilizing in response to declining commodity prices and investor pressure to reallocate surplus cash to shareholders.
The statistics confirm this pattern. Oil and natural gas rig activity in the US has seen a 6% drop since the start of the year, from the post-pandemic recovery peak, to stand at 731 last week, according to oilfield services firm Baker Hughes. This pales in comparison to mid-2014 when almost 2,000 rigs were operational at the height of the shale boom. A 10% reduction in gas-directed rigs last week represents the steepest weekly fall since 2016.
Matt Johnson, CEO of energy data firm Primary Vision, suggests that today’s operators are more cautious and discerning, given the volatile economic environment. They are closely watching oil prices before committing to new drilling crews, despite last year’s oil and gas rally windfall.
Simultaneously, the modest increase in shale drilling activity seen last year, largely driven by private companies, is slowing as these firms are acquired by cash-rich public companies, which face more scrutiny over returning cash to shareholders.
Despite this slowdown, the Energy Information Administration (EIA) projects that US crude oil and dry gas production will reach new annual records this year. Yet, with drilling activity plateauing, growth is expected to decelerate. For instance, the EIA predicts oil production will rise by just 200,000 barrels per day (b/d) over the next 12 months to 12.6 million b/d, a far cry from the over 1 million b/d annual increases seen between 2012 and 2014.
This trend is further intensified by weakening energy prices. US oil prices are down more than 40% since Russia’s invasion of Ukraine last year, settling just below $71 recently. Similarly, benchmark US gas prices have fallen about two-thirds over the same period.
Several publicly traded gas-focused producers, including Chesapeake Energy and Comstock Resources, alongside numerous private companies, have signaled their intent to reduce drilling activity this year, particularly in the Haynesville shale basin that spans Texas and Louisiana.
Drilling contractor Nabors Industries is one of many firms reallocating rigs from gas-focused basins to oil-focused regions like the prolific Permian basin in Texas and New Mexico. However, they and other gas drillers are banking on the future construction of new terminals for exporting liquefied natural gas, a potentially promising revenue stream for US gas producers. Yet, no new projects are expected to commence until late 2024.
As a result, auctioneer Kruse is seeking buyers outside the “mushy” US market, targeting potential customers in Latin America and the Middle East. He believes that these overseas markets present a more realistic prospect of finding end users for the rigs.