By Sneha Banerjee and Swetha Gopinath
Aug 26 (Reuters) - North American onshore rig contractors
are spending millions of dollars to add costly "walking" rigs to
their fleet, a move that may seem counterintuitive at a time
when the slump in crude prices shows no signs of abating.
Such rigs "walk" from wellbore to wellbore, unlike a regular
rig that has to be taken apart and reassembled for each move,
and save shale producers time and money - as much as 30 percent
of the cost to drill a well.
Even though the returns on these investments will not be
immediate, rig contractors such as Patterson-UTI Energy Inc
PTEN.O and Pioneer Energy Services PES.N are pandering to
the demand for these rigs.
They are banking not only on demand increasing for walking
rigs, but also on rates picking up, once oil prices recover.
Demand for rigs have taken a walloping, as oil producers
have slammed the brakes on drilling new wells to cope with a 28
percent decline in U.S. crude CLc1 prices this year.
"As activity starts picking up again, the majority of
requests from operators, I think, will be for pad-oriented
rigs," said Pioneer Energy CEO Stacy Locke, referring to the
popular practice of drilling several wells in one location.
This promise of higher demand and better rates has led rig
contractors to either build new walking rigs or spend $1 million
to $2 million to attach giant hydraulic walking systems on their
regular rigs.
It costs $20 million to $25 million to build a new walking
rig, according to Evercore ISI analyst James West. A regular rig
used to cost $10 million to $15 million a decade ago and no one
has built one recently, he said.
Before oil prices slumped, walking rigs commanded $27,000 to
$30,000 per day, compared with $22,000 to $25,000 for a regular
rig.
A walking rig can move from one wellbore to another rather
quickly - 10 meters in less than an hour. Moving a regular rig
can take days and cost up to $1 million.
The allure of such savings is hard for shale producers to
pass up.
Producers such as EQT Corp (NYSE:EQT) EQT.N and Laredo Petroleum Inc
LPI.N are increasingly opting for pad drilling and prefer
walking rigs.
CWC Energy Services Corp CWC.V had to put a walking system
on one of its nine rigs because a customer demanded it, CWC CEO
Duncan Au said.
SLOW RETURNS
While savings for a shale producer is immediate, it will
take quite some time for a rig contractor to get significant
returns on their investment.
"For the rigs that we are building this year, the payback is
between four and five years," Patterson Chief Executive William
Hendricks told Reuters.
The payback on a new walking rig is three years in a normal
demand environment, and between six and nine months on a rig
refurbished with a walking system, according to Wunderlich
Securities analyst Jason Wangler.
Still, Patterson, one of the top five contractors in North
America based on its hi-spec rig fleet, plans to build 16
high-tech Apex rigs this year. Of those, 15 will be able to
walk. It already has more than 100 walking rigs in its fleet of
159.
Rates for all rigs have collapsed by as much as 50 percent
in the past year, according to Evercore's West.
"In a market as bad as this, all kinds of rigs kind of get
bunched up at really low rates," said Pioneer Energy's Locke.
About two-thirds of Pioneer Energy's 36-rig fleet is now
capable of pad drilling. Of them, 24 are walking rigs. The
company plans to add another three by the end of the year.
Independence Contract Drilling Inc ICD.N has 14 rigs and
plans to upgrade its last non-walking rig by the end of the
year.
(Editing by Sayantani Ghosh and Savio D'Souza)