Synopsis

Some Midcontinent service companies cutting employee wages as operators press contractors for pricing concessions. Well servicing pricing now down 20% versus last quarter as the sector suffers from an oversupply of equipment in a market where demand for services is falling. Watch for the next Midcontinent well service report in April 2015.

Part I. – Survey Findings

Among Survey Participants:

  • Rig Demand Down QTQ [See Question 1 on Statistical Review]. All eight respondents said that demand had dropped in 1Q15 vs. 4Q14 and blamed lower oil prices. Oil companies are demanding rate reductions and contractors are cutting prices across the board or client by client. To date, only one respondent had lowered wages, but all said that wages would be the next item cut if the situation did not change.
    • Mid-Tier Well Service Manager: “The majority of people I know in well service and drilling have lowered prices about 20% QTQ, while supply stores have not lowered except maybe on pipe. I believe pipe is down 15% QTQ.”
  • Number of Rigs Excessive [See Question 2 on Statistical Review]. Only one of the eight respondents said that the inventory of rigs in the Midcontinent area is sufficient, the other seven said that rigs were stacking up and there is an excessive amount of rigs available in the market as demand has shrunk QTQ.
    • Mid-Tier Well Service Manager: “We have rigs stacked or have stopped production on the two we were assembling, but we continue to honor any components or parts that I had ordered for those rigs.”
  • Well Service Companies Mostly Evenly Split Tasks [See Question 3 on Statistical Review]. Among all respondents, workover on average accounts for 23% of work, routine maintenance accounts for 31%, plug and abandonment (P&A) work accounts for 17% and completion work accounts for 28% of all work performed. See Table I below.

  • Coiled Tubing Hardly Used in Midcontinent [See Question 4 on Statistical Review]. None of the respondents said that use of coiled tubing is growing. Seven of the eight do not use coiled tubing or had used it in the past but did not find it cost efficient. One said they are not using more coiled tubing.
    • Mid-Tier Well Service Manager: “To be honest, in this area we have not been around a coiled tubing rig in years because there is very little horizontal in this area. They tried it before, but it wasn't profitable.”
  • Hourly Rates Under Pressure [See Question 5 on Statistical Review]. Most of the workover rigs' horsepower fall within the range of the 500 series. The 500 HP hourly rates average $280 to $390/hour depending on what ancillary equipment is contracted. See Table II for Average Hourly Rates.
    • Mid-Tier Well Service Manager: “We are seeing rates down $260 to $210/hour because we have lost all our allied charges. We could charge another $200 to $300 a day for allied equipment. It's supply and demand.”
    • Mid-Tier Well Service Manager: “It depends on who you are talking to as to whether or not you are cutting rates a lot or a little and how important the customer is to you. One of ours ran at us for a 30% discount and we probably didn't give them the 30%, but we came close.”

  • Hourly Rates Down QTQ [See Question 6 on Statistical Review]. Respondents said that hourly rates for well service rigs in the Midcontinent are down on average 19% QTQ. Most expected that rates would continue to drop if oil prices did not start climbing anytime soon.
    • Mid-Tier Well Service Manager: “We cut our rates 20% and cut wages 20%, I think labor hours are shrinking as well because there is not a lot of interest in big projects.”
  • No New Competition [See Question 7 on Statistical Review]. All respondents said that competition had not increased QTQ, and they were not anticipating it would be given lower oil prices. However, two respondents did say they worry smaller competitors in the market are lowering prices too much, which is not good for the market overall.
    • Mid-Tier Well Service Manager: “From our standpoint, I've been just trying to find some numbers that I would be comfortable with. On average rates are down 15% to 25%.”
  • 2015 Labor and Wages Will Suffer [See Question 8 on Statistical Review]. All respondents said if oil rates continued to be depressed there would be more stacking of rigs, more cutting of rates, and labor and wages would begin to be affected. One respondent believed if prices remained where they are now, the number of wells drilled in the Midcontinent area would drop by 80% YTY.
    • Mid-Tier Well Service Manager: “For 2015, if oil prices remain low, we are going to see a big shake-up in service companies and if we don't start seeing them inch up, we are looking at conditions getting worse. A lot of people think this is just now starting, but we are six months into this price drop. You hear a lot of people saying we will see stabilization mid-year. We are pursuing that and trying to keep our workforce.”

Survey Demographics

Hart Energy researchers completed interviews with eight industry participants in the workover/well service segment in the Midcontinent area. Participants included eight managers with well service companies. Interviews were conducted during mid-late January 2015.

Part II. – Statistical Review Workover/Well Services [Mid-Continent]

Total Respondents = 8 [Workover Companies = 8]

1. Do you expect demand for workover rigs to grow, remain the same, or shrink in 1Q15 compared to 4Q14?

Shrink: 8

2. Would you characterize the supply of rigs in your area as excessive, sufficient, or insufficient to meet the 4Q14 demand?

Sufficient: 1

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?

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

No more use of coiled tubing: 1

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

[Rates shown are an average rate among all respondents in the category.]

6. Do you expect workover rig hourly rates to increase, remain the same or decrease over the next 3 months?

Down (no % given): 2

Down 10%: 1

Down 20%: 4

Down 25%: 1

Average: Down 19%

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: 8

8. What do you foresee happening in your area in 2015 if oil prices stay low?

Rates will drop even further: 3

Rigs will stack up: 2

Labor and wages would come down: 2

Demand would continue to decline: 7