$18 billion worth of U.S. land rigs have fallen victim to the downturn.
During the downturn, the rush to stack drilling and completion equipment has rendered an unprecedented amount of invested capital unproductive. Looking at the U.S. land rig segment alone, we estimate drilling rigs worth roughly $18 billion in terms of replacement value have gone idle. It’s important to note that fair value is different (and currently lower) than replacement value.
Across the U.S., approximately 1,160 rigs have been idled since late-2014, per Helmerich & Payne estimates. We estimate the replacement value of an A/C rig is $20 million-$25 million per copy, while the idled SCR and mechanical rigs have a weighted average replacement value of about $12 million each. Thus, the total replacement value of idle land rigs in the U.S. today is approximately $18 billion.
And herein lies a key oilfield crash dilemma. In down cycles, service and drilling contractors become increasingly desperate to cut operating costs, but they must also shepherd their unproductive (stacked) capital assets, lest they rust away and the value be impaired.
When the recovery eventually comes, there will be a large portion of the stacked fleet that requires significant reinvestment because working order was not preserved. For portions of the stacked legacy fleet, the reinvestment needed will never again make economic sense and impaired rigs will be retired. Some of the $18 billion has already been permanently lost. The longer the downturn lasts, the more value will be lost.