Synopsis

Like their counterparts on the drilling side, workover contractors had seen stability come to the Appalachian market. Then commodity prices dropped once again and well service contractors are worried that the new round of falling prices may entail additional cutbacks in activity during the second half of 2015 as operators experience another revenue hit. Additional reasons for a potential pullback outside commodity prices is that several operators are facing issues such as a lack of takeaway capacity to get product to market, or Appalachia has been a noncore market for their companies and they are focusing efforts on core acreage in other regions. Additionally two of the major international oil companies are significantly ramping down operations in the region. Routine maintenance accounted for 50% of job mix in the current report, down from two-thirds in May, while completions stayed the same at 20%. Pricing was unchanged at a little more than $300 per hour for the benchmark 500 series rig. Watch for the next Appalachian workover report in November 2015.

Part I. – Survey Findings

Among Survey Participants:

  • Workover Rig Demand Stable But Tenuous
    [See Question 1 on Statistical Review]
    ​All respondents said that workover rig demand had remained steady in the Marcellus Shale area with the last few weeks seeing no decline in demand, but no pick-up either. However, a renewed pessimism has emerged among respondents during the last couple of week because of lower oil prices and the Iran deal. Respondents expect these factors will have a negative impact on well service work in the upcoming three months.
    • Mid-Tier Well Service Manager: “Things are looking pretty grim right now. People are talking about oil going to $30/barrel. If that happens, this whole thing will shut down. You cannot make money on $30 oil, though you can lose money.”
  • Number Of Rigs Excessive
    [See Question 2 on Statistical Review]
    ​All respondents said there is now an excessive amount of rigs in the Marcellus Shale area, as operators seek ways to control cost and are only doing what work is necessary.
    • Top-Tier Operator: “We had an announcement from two majors that they are shutting down all of their drilling rigs for the rest of the year. It was a surprise. They have cancelled frack jobs and don't know if it is because of the low prices or what. They laid off quite a few folks.”
  • Well Service Companies Focusing on Maintenance
    [See Question 3 on Statistical Review]
    ​Among all respondents, routine maintenance on average accounts for 50% of work, as operators focus on only what is necessary in the Marcellus Shale area. Completions account for 20%, plug and abandonment (P&A) work accounts for 10% and workover accounts for 10% of all work performed.
    • Top-Tier Well Service Manager: “I don't think it has gotten worse, but not better. The P&A work they were keeping one rig busy with that but we only have the P&A rig working and water trucks.”

Maintenance

Completion

P&A

Workover

25%

25%

25%

25%

80%

0%

0%

20%

25%

25%

25%

25%

20%

70%

10%

0%

80%

20%

0%

0%

20%

0%

80%

0%

100%

0%

0%

0%

Average 50%

Average 20%

Average 20%

Average 10%

  • Use Of Coiled Tubing Not Growing
    [See Question 4 on Statistical Review]
    None of the respondents were using coiled tubing and did not expect use to grow in the area.
    • Mid-Tier Well Service Manager: “We use strictly workover rigs.”
  • Hourly Rates Vary Depending on Relationships
    [See Question 5 on Statistical Review]
    ​The hourly rate for the popular size 500 HP series is $307/hour on average, which reflects the discount contractors are giving in response to the lower oil prices; however it also reflects a wide range starting at $260/hour up to $400/hour. See Table I for average hourly rates.
    • Mid-Tier Well Service Manager: “Prices could drop further. Rumor has it that one major just shut down all their dry gas producing wells so that it is not looking too good. We're not sure what our strategy is because it looks like crude oil might go way down. Iran just talking about pushing more oil out there. It's getting ugly.”

Table I. — Average Rates For Certain Workover Rig Sizes In The Marcellus Shale area

Rig Size (HP)

Average Rate

300 HP Series

$187/hour

400 HP Series

$278/hour

500 HP Series

$307/hour

  • Hourly Rates Flat
    [See Question 6 on Statistical Review]
    ​Hourly rates for well service rigs are flat quarter-to-quarter after dropping 20% to 25% earlier. Although prices have not dropped further, respondents were not optimistic that they would remain steady given the lower oil prices and uncertainty with Iran’s supply.
    • Mid-Tier Well Service Manager: “I’ll say the pain up here for certain operators is just starting, and we don’t see a recovery in rig counts in Appalachia until mid-2016.”
  • Competition Is Neutral
    [See Question 7 on Statistical Review]
    ​None of the seven respondents said that competition has stepped up either from existing players or new companies coming into the market.
    • Mid-Tier Well Service Manager: “Appalachia went from 120 rigs to 80 today, and we think that number will continue to drop as noncore operators call it quits. Also, core operators who don’t have firm transportation to get their gas to better markets, they’re now being forced to shut down as well.”
  • Strategies Vary Among Companies
    [See Question 8 on Statistical Review]
    ​Respondents are mostly in a holding pattern. Only one of the seven said that business continued to be in growth mode. The other six respondents said that they were trying to maintain costs and equipment and ride out this downturn.
    • Mid-Tier Well Service Manager: “This month [July] is going to be our highest revenue month but we are still a new company and the only snubbing and rig company based out of this area. We have all of our marbles here. However, August and September are hard to project to even a few months out. We do see it softening in the next couple of months and are trying to line up business but July was a great month and we’re not sure what to expect for the next two months.”
  • Most Wells Are Completed
    [See Question 9 on Statistical Review]
    ​Only one respondent reported that operators were drilling wells and not completing, while four said they had not heard of wells not being completed. One said that hardly any wells were being drilled to be completed. Another respondent said all wells are being completed.
    • Top-Tier Operator: “There are some not completing wells but there are some customers that are very, very active. Most of our work is completion (70%) punch in and drill out with very little P&A (10%). The majority out here are still completing.”

End Survey Findings

Survey Demographics

H A R T E N E R G Y researchers completed interviews with seven industry participants in the workover/well service segment in the Marcellus Shale area. Participants included two oil and gas operators and five managers with well service companies. Interviews were conducted during late July 2015.

Part II. – Statistical Review

Workover/Well Service Segment

[Marcellus/Utica Shales]

Total Respondents = 7

[Oil & Gas Operators = 2, Well Service Companies = 5]

1. Do you expect demand for workover rigs to grow, remain the same, or shrink in third-quarter 2015 compared to second quarter?
Remain the Same: 7

2. Would you characterize the supply of rigs in your area as excessive, sufficient, or insufficient to meet the third-quarter 2015 demand?
Excessive: 7

3. Looking at your slate of well service work—on a percentage basis—how much of it is workover vs. routine maintenance vs. plug & abandonment (P&A) vs. completion work?

Maintenance

Completion

P&A

Workover

25%

25%

25%

25%

80%

0%

0%

20%

25%

25%

25%

25%

20%

70%

10%

0%

80%

20%

0%

0%

20%

0%

80%

0%

100%

0%

0%

0%

Average 50%

Average 20%

Average 20%

Average 10%


4. How are coiled tubing (CT) units impacting your company's slate of work? Would you say CT units are getting more, less or the same amount of work that would have gone to work over rigs compared to six months ago?
Do not use coiled tubing 7

5. What size (horsepower) workover rigs do you own? What is a representative rate for this size workover rig in your area?

Average Rates For Certain Workover Rig Sizes In The Marcellus Shale area

Rig Size (HP)

Average Rate

300 HP Series

$187/hour

400 HP Series

$278/hour

500 HP Series

$307/hour


6. Do you expect workover rig hourly rates to increase, remain the same or decrease over the next three months? By what percentage?

Flat 0%:

7

Average:

Flat


7. Have you noticed competitors from other regions entering your area? What has been the effect on your fleet's utilization and hourly rates?
No: 7

8. What strategies are companies putting in place to cope with the low oil prices?
Hang on: 2
We are still adjusting: 1
We don’t know what to expect: 1
Trying to line up work now: 1
Things are not going well: 1
Headquarters is talking about sending down more rigs: 1

9. What are you seeing in terms of the number of wells being drilled but not completed?
Hardly any drilling, so no completing: 1
We are completing: 1
Some are not completing, while some are active: 1
No change: 4

End Statistical Survey