The US onshore drilling industry has faced an uphill climb since the doldrums of the downturn when the rig count plunged by 80% from late 2014 to mid-2016.
The herd has been thinned to only the most technologically advanced rigs. Demand for these “high-spec” or “super-spec” units has spiked during the industry recovery as operators push lateral lengths and ramp up pad drilling. At the same time, those firms insist on faster drill times and better well quality. Hoping to stay ahead of the curve is rig contractor Helmerich & Payne (H&P), an almost 100-year industry staple.
Surviving for such a long time in perhaps the most volatile of industries requires a certain malleability. John W. Lindsay, H&P president and chief executive officer since March 2014, has been with the company for more than three decades and has been part of its multiple iterations.
During the recent Deloitte Oil and Gas Conference, Lindsay recalled two “bet the farm” moves in the early 2000s that shaped today’s H&P. First, it built 32 FlexRig 3s featuring AC drives “on spec”—meaning without contracts in place. Operators liked them but Wall Street hated the move because “we were adding to capacity and that was all they could see,” he said. The second was spinning off its exploration and production unit—now Cimarex Energy, a growing Permian operator—to become a pure-play contractor.
The reinvention helped H&P’s share price eventually approach $120 by mid-2014, but its value dived by two thirds following the commodity price crash. The company’s US rig count plunged to 67 rigs working in the summer of 2016 from around 300 before the downturn. “We had some massive layoffs, but our workforce staffing did a great job in going through exit interviews,” he said. “And so when the market returned, we put 128 rigs back to work in fiscal ’17. We had an 85–90% acceptance rate in employees coming back to us.”
H&P’s rigs now make up 20% of the overall US land fleet and 40% of the overall “super-spec” fleet, with units in every major basin, the company says. It has the most rigs in the Permian Basin of West Texas and southeastern New Mexico, Eagle Ford Shale of South Texas, and Oklahoma SCOOP and STACK plays. It also has 25% of the rigs in Argentina’s Vaca Muerta shale play. Lindsay said that while the company has had success in Argentina, the biggest challenge in shale drilling internationally has been a lack of infrastructure.
“We’ve had small operations in the Middle East, but we would obviously love to do more in Saudi [Arabia], Kuwait, and other countries,” he said, “if they get to that point where unconventional resource plays become more economic. And I think that has to ultimately be the driver.”
Lindsay noted that H&P’s business model is unique in that it designs, manufactures, maintains, and operates its own rigs. He said the company tries to emulate Southwest Airlines “because they have great customer satisfaction, great customer focus” as well as a uniform fleet of Boeing 737 jets. He added that H&P has historically been financially conservative with little debt, helping it survive the downcycles.
Focusing on Well Placement, Quality
A major source of new employment at H&P has been its continued integration and development of new technologies. A decade ago, the company launched its “Center of Excellence” in Tulsa, Oklahoma, which currently supports and monitors its FlexRig fleet both in the US and abroad. “We’ve been using data in a large way since 2008. We can do that because we have a digital operating platform” on which to work, he said.
The platform is now built on the company’s 2017 acquisitions of Motive Drilling Technologies and Magnetic Variation Services (MagVAR). The additions underpin H&P’s focus on wellbore quality and placement.
Originally backed by Hunt Energy Enterprises, a venture capital unit of Hunt Consolidated, Motive’s bit guidance system uses cognitive computing to guide directional drilling. “Rather than the directional driller doing the calculations on his own, Motive has an algorithm, it’s software-based, and it’s giving turn-by-turn instructions to the directional driller,” he explained.
The quality of work overseen by humans in the driller’s cabin varies based on their competence. However, Motive “drills with factory-like consistency” Lindsay said, having already penetrated more than 10 million ft of rock across every major US basin. It’s been deployed on more than 30 rigs, about half of which are H&P FlexRigs.
MagVAR provides measurement while drilling (MWD) survey corrections by identifying and quantifying MWD tool measurement errors in real time, improving well spacing and helping minimize the chances of interwell communication—critical these days in crowded shale plays. The technology has been used globally by some 40 operators and has analyzed and corrected some 3,000 wells, the company says.
More recently, H&P announced that it will bolster its automated drilling capabilities with deployment of AutoSlide on its FlexRigs. The technology standardizes well paths by providing automated slide drilling, using machine learning to interface with rig control systems. It finds optimal parameters in real time to boost rate of penetration and accuracy while adapting to different downhole formations.
“Essentially, what we're doing here is we've taken the Motive turn-by-turn instructions, and rather than feeding them to the directional driller or our driller on the rigs, we’re feeding them into the FlexRig software,” Lindsay explained. “So then the operating system is giving the turn-by-turn instructions to the rig, the rig equipment, the top drive, the drawworks, and the mud pumps.”
In early field trials, AutoSlide has “outperformed very experienced directional drillers,” he said. “We're in alpha and beta testing now. We think this product will be commercial in the first quarter of 2019.”
Taken together, these technologies remove the directional driller from the rig, allowing them to be stationed in an off-site command center. Motive and MagVar each has a command center in Dallas, Texas, and Denver, Colorado, respectively. In addition to those locations, H&P has software applications under development in Austin, Texas, as well as in Mexico and India.
Good Results, But Revenue Could Be Better
With advancements such as these, H&P has dramatically improved its drilling performance, Lindsay said. Comparing 2018 with 2014 rig totals, he noted H&P has averaged 60 fewer rigs working but its average rig is drilling 25% farther. Average wells per year per rig have increased by a full well over that time. “So [operators] got an additional well, and they got an additional 2,500 ft of wellbore,” he said.
However, Lindsay said H&P still isn’t “getting all the value that we believe we’re creating” because of an outmoded land business pricing model that relies on day rates for revenue. Super-spec FlexRigs are currently priced in the mid-$20,000s/day while FlexRig spot pricing is around $22,000/day.
“We’ve invested over $800 million in FlexRig upgrades to super-spec capacity over the last 2 years. We’ve invested billions in new FlexRigs over the last 10-plus years,” he said. “So I think there's an opportunity for some different business models, some different pricing models.” Alternatives include performance-based pricing models such as ones related to footage drilled, but those can be difficult to maintain.
Lindsay said he’s hopeful H&P’s customers are “willing to visit” with the company regarding new pricing schemes.