NorthAmericaEquityResearch05June2019OilServicesLandRigDeepDivePartI:Supply:GoldilocksUpgradeCycleHasLegs;HPinPolePositiononSupplyCurve,MostDryPowder,AddtoAFLOilServicesandEquipmentSeanCMeakim,CFAAC(1-212)622-6684sean.meakim@jpmorgan.comBloombergJPMAMEAKIMAndrewPHerring,CFA(1-212)622-8585andrew.p.herring@jpmorgan.comJ.P.MorganSecuritiesLLCSeepage27foranalystcertificationandimportantdisclosures.J.P.Morgandoesandseekstodobusinesswithcompaniescoveredinitsresearchreports.Asaresult,investorsshouldbeawarethatthefirmmayhaveaconflictofinterestthatcouldaffecttheobjectivityofthisreport.Investorsshouldconsiderthisreportasonlyasinglefactorinmakingtheirinvestmentdecision.www.jpmorganmarkets.comWearelaunchingLandRigDeepDives,thelatestinourReshufflingtheDeckseriesinwhichwepublishasetofdeepdivesonatopicorcompany.Thisroundwe’vechosenperhapsthemostenduringsub-sectorintheLower-48:landdrilling.Thisgrouphasbeenunderheightenedscrutinyin2019astherigcounthasexperiencedamildrollover(-7%YTD)amidthecontinuedpushforE&Pcapital‘austerity’.Wekickoffourseriesfocusingonsupplyandpublishinganupdatetoasetofreportswebeganinearly2016,justastherigcountwasbottoming(-79%off2014peak,-59%fromcurrentlevels)andtheupgradecyclewasinitsinfancy.Since2016,weestimate~400rigshavebeenupgradedintheU.S.,atacollectivecapitalcostofapproximately$1.6bn.Webelievethattheupgradecycle,whileconsiderablyhigheronthecostcurvetwoyearsin,stillhasplentyofroomtorun(upto~230remain),anddon'tforeseeanewbuildcyclethroughatleast2020(andlikelywellbeyond).Upgradesoffersuperioreconomicstothedrillers,providingasolidrunwayformoderategrowthcapitalcoupledwithfreecashgenerationthatishardtofindinU.S.services.TheBigFourdrillersdominatetoday’ssuper-specinventory,holding~80%ofindustrytotal.HP,withthelargestL-48fleet,claimstheleadingsuper-speccountaswellwith230rigs(34%share).HPandPTENhavethehighestmixesofsuper-specrigs(66%and61%,respectively),whileNBR(55%)andPD(50%)lagsome.Lookingahead,HPhasthemostrigstoupgradeatamongthelowestaveragecost,witht...
