CRITICAL ISSUES IN DRILLING & COMPLETIONS
Drillers seek ways to maintain
capital discipline while still
investing to keep rigs competitive
Despite market optimism, drilling contractors
remain wary of focusing on growth when
it doesn’t translate into shareholder return
Dan Hoffarth, CEO, Citadel Drilling
BY STEPHEN WHITFIELD, SENIOR EDITOR
What would you say are some of the
biggest challenges the industry faces
in the unconventional space, and how
do you think the industry should
address those challenges?
I think the biggest critical issues for us
are still going to be focused on utilization
and people, but I believe that 2024 will be a
better year than 2023 – or at least, the back
half of 2023.
I think we need to go back and look at
what happened in 2022 and 2023, so we
can figure out where things need to go in
order to have a more desirable outcome
in 2024. What we’ve seen is decreased
gas prices really hitting in places like the
Haynesville, the SCOOP/STACK and the
Eagle Ford. That drop in rig count has a
direct impact on everyone’s books. It’s a
major key indicator to understand that we
need both consistent gas and oil prices for
drilling contractors to have a decent busi-
ness model.
We have a bunch of super-spec rigs sit-
ting on the sidelines because of the drop in
gas prices. That creates market pressure,
which creates pricing pressure and a loss
of jobs. You’ve got 15 to 18 people per rig,
and then you add on the associated servic-
es, so we’re talking around 150 jobs per rig.
Where do those people go during a period
of inactivity, and what does the industry
do when gas prices recover?
I believe they will recover in 2024, and
we’re going to have to go back to the mar-
ket and try to find some of these people.
A lot of them will say they’re not coming
back to the oilfield because they found
another pretty decent job without the ups
and downs. As an industry, how do we
continue to fight the cyclical nature of our
business where we are putting people to
work and then letting them go?
I guess the cycles are just part of the
industry, aren’t they?
24 I mean, that is the industry. We have
to be able to manage our assets based
on a cyclical outcome. We’ve never had
anything other than cycles in the drilling
space. More than just people, that also cre-
ates challenges around equipment. How
are we going to meet operators’ equipment
needs when we don’t have a confident
view on utilization?
More importantly, how can drilling con-
tractors be expected to invest the capital
required to improve and maintain top level
equipment if there is not a clear path to
both payout and profitability? That’s going
to continue to be another major challenge
for the industry as we move forward.
You mentioned the super-spec rigs. As
gas prices go back up, how important
will it be for drillers to have those rigs
ready to work quickly?
The best rigs in the market get picked
first every time. Super-spec rigs have prov-
en time over time to create the greatest
degree of production per day of any unit of
machine. To me, that’s paramount.
For any operator, if you have that choice,
you’re going to want the higher pump
capacities. You’re going to want the high-
er torque capacities out of the top drive.
You’re going to want the greater racking
capacity. You’re going to want to have a
moving system, a handling system for the
BOPs and the most advanced fluid han-
dling systems. And then you’re going to
want all the digital applications.
When we take a look at production per
rig year over year, and why we need fewer
rigs to produce more than we did 10 years
ago, it’s the quality of the equipment. It’s
also important to look at the quality of the
people, the quality of the digital assets,
the quality of the engineering – but none
of that can shine if you don’t have the
machine behind you that has the capacity.
You cannot race a Formula One race in a
stock car. It doesn’t matter who your driver
is, or who your pit crew is, or what the
track is. You will finish last in every race.
For the past few years, we’ve seen a
focus on capital discipline from E&Ps,
and that’s had a trickle-down effect
throughout the industry. Even now, the
most recent quarterly reports from
E&Ps have touted returning cash to
shareholders. As we see a gas price
recovery, do you think capital disci-
pline will still be the MO for the industry
moving forward? If so, how does that
affect your business?
We need to maintain a balance with
regards to every part of our business. On
one pillar, we need to have balance with
our equipment – keeping our equipment
at a super-spec level and in top shape.
On another pillar, we need high-quality
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CRITICAL ISSUES IN DRILLING & COMPLETIONS
employees who can thrive in this busi-
ness. The leadership team is the third
pillar – having leaders who can see where
the business needs to go and how to evolve
that business.
But then there’s a fourth pillar, which
is shareholder health. If we don’t have
shareholder health, I don’t see how you can
succeed. The shareholder requires a mar-
gin on their investment. I can’t think of a
shareholder out there in a personal or cor-
porate capacity that will knowingly invest
in any company without the expectation
of a full return on that investment plus a
premium. There’s a very basic expectation
of getting a return on your investment,
and that’s rarely happening, if at all, in the
contractor space.
I am also not saying it’s been happening
that much at the operator level either, but
in today’s world when the typical inves-
tor makes a choice to invest in the energy
space and they can choose between a drill-
ing contractor or an oil company – rarely
do they choose the driller.
It’s always great to focus on growth, but
if that growth isn’t translating into share-
holder return, you need a different model.
So, I think capital discipline is going to be
a continued focus for everyone moving
forward. From a spending perspective, how do
you maintain the balance of being
disciplined while still investing in the
equipment that keeps your rigs com-
petitive? Are there any areas where
you see a bigger bang for the buck?
The number of newbuild rigs have
always been the canary in the coal mine
telling us whether we’re successful in
maintaining that balance. We aren’t seeing
a single North American land-based drill-
ing contractor building new rigs right now,
and they haven’t for years. Obviously, that
balance was not there, and it continues to
not be there.
What are our options, then? For those
of us that are in the super-spec rig space,
the key priority is maintaining super-spec
status. We went from the three-generator
to the four-generator models. We’re con-
tinuing to increase racking capacity. Drill
pipe selection has continued to evolve.
We’re looking to increase pumping capaci-
Citadel is working to incorporate more automatio n into its rig fleet, including on Rig
5 (pictured ), especially in terms of turning manual tasks into mechanized pro-
cesses. The company has also invested in its own operating system to allow for
more flexibility and better integration with digital technologies.
ties across the board. And then we started
looking at all the areas where we can
become more streamlined in our opera-
tions. On top of that, we’re continuing to drill
wells faster and faster. For Citadel Drilling,
between 2019 and 2022 we drilled an extra
37 wells year-over-year on average. The
average days per well went down from 23.8
days to 18.4 days in that time frame. Our
total footage drilled in 2022 was 320,000 ft
higher than what we drilled in 2019. We’re
not staying flat. We’re still finding ways to
increase production. The equipment is not
taking a break, so you have to take main-
tenance extremely seriously. In 2022, we
worked our rigs every single day. In 2023,
the only days our rigs didn’t work was dur-
ing the recertification process.
However, going back to what I said ear-
lier, shareholder value has to stay in the
forefront. We can’t spend every dime we
have on upgrades. We have to generate
returns. What are you doing on the digitaliza-
tion front?
One of our primary focuses has been
the integration of digital products and
equipment. We didn’t know what that was
going to look like, but we had to have the
flexibility to go down those roads.
So, owning our own operating system
was a key element for us to maintain that
flexibility. We’re one of the few drilling
contractors that has its own software for
an operating system. On one side, we focus
on programmable drilling features, such
as auto driller, MPD, ECD management
services, as well as other inter-program
things like auto-downlink for RSS tools,
auto trip, auto pipe working features and
anti-collision. On the other side of digital assets, we
partner with companies that excel in that
space and integrate that technology into
our rigs to ensure we provide our clients
with the most modern and optimal solu-
tion the industry has to offer.
We’re seeing an increase in lateral
lengths in unconventional wells, and
now three-mile laterals are becoming
more commonplace. Is today’s rig
equipment capable of consistently
drilling these longer laterals, or are we
going to need upgrades?
I think we can continue to push the
thresholds there, but we’re always going to
find a new weak link in that equation. At
one point, with the three-mile lateral, the
weak link was the drill bit. Then it was
the fluids that we were using to maintain
wellbore stability. Then it became a ques-
tion of whether we can effectively frac at
that distance. And we started checking off
those things.
So, then it comes back to the drilling
rig. What’s the full capacity of the der-
rick? Can we rack the vertical depth plus
three miles of 5½-in. drill pipe in that der-
rick? I do believe there is a potential need
in the future to have new substructures,
new derricks and new racking boards
with additional capacity. Pump pressure
continues to be important, and pressure
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