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Morningstar | Outlook for U.S.-focused Land Drillers Remains Weak Due to Our Forecasts for Declining Rig Counts

Helmerich & Payne has exhibited robust operating performance relative to peers in the past several years. It increased its share of U.S. land horizontal rig revenue days from 14% to about one fifth amid a general downturn for drillers. By building a fleet of rigs optimal for the multiwell pad drilling that offers the best economics for oil and gas producers, H&P has positioned itself on the leading edge of industry trends. However, we believe that this relative operating outperformance will be overshadowed by the overall industry climate. H&P’s aggressive capital spending to build a large rig fleet means that it needs high rig counts to realize high returns on invested capital. Given our assumptions about market share and margins, a midteens ROIC for H&P, as the company earned in the 2010-14 period, would require a U.S. horizontal rig count average of well over 1,000. Such a high rig count would yield an unsustainably high level of production, which is incongruent with our current supply forecasts.Despite the recovery in U.S. shale activity, the U.S. land rig market today is still marked by overcapacity and low day rates and margins. We expect utilization for even Tier 1 rigs (high-quality AC rigs with 1.5k-plus horsepower and multiwell pad drilling capabilities) to remain below 80% at midcycle. While our view is that incremental global oil supply needs will largely be met by U.S. tight oil in 2018, fewer rigs will be needed to meet this requirement than in the past, owing to increased efficiencies. This limits the scope for improved pricing and utilization for all U.S. land drillers even as overall industry fundamentals recover.