HP Helmerich and Payne Inc

By Ryan Dezember 

Drilling rig owners and others who lease equipment to U.S. energy producers are forecasting a slowdown in activity during the second half of the year as natural-gas prices plumb lows and exploration-and-production companies exhaust their budgets.

The number of rigs drilling in the U.S. has declined by about 10% over the last year, to 946 last week, according to oil-field-services firm Baker Hughes, and big drilling contractors are telling investors to expect more to be idled in the coming months.

"We had expected drilling and completion activity to have reached the bottom by now, but that doesn't appear to be the case," Mark Siegel, chairman of rig operator Patterson-UTI Energy Inc., told investors Thursday on a call to discuss the company's second-quarter results.

The Houston company said that on average, 158 of its rigs were operating during the second quarter, down from 176 during the same period a year earlier. It said it expects a further 10% decline this quarter.

Patterson-UTI's stock has lost about 39% over the last year. Rival Helmerich & Payne Inc. last week made similarly dour forecasts for its fleet and has been stripping components from recently decommissioned rigs, a sign that it sees its downsizing as lasting. Its shares are down 21% since this time last year.

Shares of Nabors Industries Ltd., another big owner of rigs, are down 65% from a year ago, and the company is scheduled to report second-quarter results after Monday's market close. Nabors had just 58% of its available 194 U.S. land rigs drilling during the first quarter.

The contract drillers' struggles reflect a broader conundrum for the U.S. energy industry since energy prices collapsed in late 2014: The rise in oil prices, up 24% this year and nearly double what it was at the depths of the bust, hasn't been enough to bring the sector consistent profitability or interest from investors.

On Monday, U.S. crude futures traded up 0.9% to $56.59 a barrel on the New York Mercantile Exchange. Brent crude, the global price gauge, gained 0.25% to $63.54 on London's Intercontinental Exchange.

In early 2016, when U.S. crude prices dipped below $30 a barrel, oil-field-services providers predicted that they would need oil to trade around $60 -- not the $100-plus perch from which it had fallen -- to regain profitability, said Robert Callaway, managing partner at Range Valuation Services LLC, an oilfield-equipment appraisal firm.

"In the last downturn, $60 was the light at the end of the tunnel," Mr. Callaway said. "Here we are, and it's not working."

Rig owners, as well as the exploration-and-production companies that lease their equipment, have been hampered by depressed natural gas prices and pressured by investors to operate with more austerity.

Natural gas hit a new three-year low on Tuesday, with futures for August delivery trading down 2% to $2.11 per million British thermal units.

Analysts with energy focused investment bank Tudor, Pickering, Holt & Co. said low prices for the power-generation fuel prompted a 40% reduction during the second half of last year in the number of hydraulic fracturing crews completing wells in Appalachia and the Haynesville Shale near the Gulf Coast.

"We're increasingly worried about a repeat," they wrote in a note to clients.

Given that the fleets of pumps used to crack open shale formations are mounted to truck beds, the equipment can be moved to oil-drilling regions, further depressing equipment lease prices there by crowding the market.

Helmerich & Payne Chief Executive John Lindsay said budget reductions accounted for most of the last 30 of the Tulsa, Okla., company's drilling rigs that were released by customers. "The effects of the industry's emphasis on disciplined capital spending continues to reverberate throughout the oil-field-services sector," he told investors on a call Thursday.

Write to Ryan Dezember at ryan.dezember@wsj.com

(END) Dow Jones Newswires

July 29, 2019 14:41 ET (18:41 GMT)

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