Margin Squeeze For Well Service Contractors

Synopsis

Demand for well servicing continues falling in the Eagle Ford, though contractors expect eventual stabilization as operators seek to maintain production to buttress cash flow. Completions have fallen from 56% of the work mix in the third-quarter 2014 to 18% currently, while maintenance work has grown from 22% of activity in the third-quarter 2014 to 30% currently. Hourly rates for a 500 series rig fell to $444 in March 2015, versus $515 at the end of 2014, and $530 in the third-quarter 2014. Some contractors are reducing pricing across the board; others on a client-by-client or job-by-job basis. Contractors expect pricing to drop another 18% on average over the next 90 days and face a margin squeeze as suppliers have yet to reduce pricing while top line revenues are falling. Wage reductions are underway. Watch for the next Eagle Ford well servicing update in June 2015

Part I. – Survey Findings

Among Survey Participants:

• Rig Demand Down QTQ
  [See Question 1 on Statistical Review]
  ​Seven of the eight respondents said that 1Q15 rig demand is down in the Eagle Ford area versus last quarter. These seven respondents thought well service demand was being hit as hard as land drilling. One said that rig demand had stayed constant QTQ because operators were taking advantage of lower rates.
  • Mid-Tier Operator: “Well service companies absolutely will not feel it as bad as the drillers because the main interest of people is to maintain cash flow so workovers are essential for that.”

• Number of Rigs Excessive
  [See Question 2 on Statistical Review]
  ​All of the respondents said that there is now an excessive amount of rigs in the Eagle Ford area, which is leading to lower rig rates and rigs continuing to stack.
  • Top-Tier Well Service Manager: “Companies are still dropping rigs in the Eagle Ford.”

• Well Service Companies Mostly Evenly Split Tasks
  [See Question 3 on Statistical Review]
  ​Among all respondents, standard workover on average accounts for 26% of work, routine maintenance accounts for 30%, plug and abandonment (P&A) work accounts for 26% and completion work accounts for 18%. See Table below.
  • Top-Tier Operator: “As far as the plugging of wells, they have to abide by the rules of state of Texas so they can only have so many inactive wells and will have to plug, even if nothing else will happen.”

• Use of Coiled Tubing Not Growing
  [See Question 4 on Statistical Review]
  ​None of the respondents were using coiled tubing and did not expect its use to grow in the area.
  • Mid-Tier Well Service Manager: “We don’t use coiled tubing.”

• Hourly Rates Consistent Among HP Series
  [See Question 5 on Statistical Review]
  The hourly rates for workover rigs do not necessarily reflect the discounts that are being offered in the Eagle Ford area because each contractor is dealing with clients differently. Some are offering a percentage discount across all clients, and some are dealing with clients on a client-by-client basis, and some are doing both. See Table I for Average Hourly Rates.
  • Top-Tier Well Service Manager: “Operators are asking us to cut our rate by 20% and when that happens we have to cut salaries and other costs by an equal amount.”
  • Table I. – Average Rates for Certain Workover Rig Sizes in the Eagle Ford

• Hourly Rates Down QTQ
  [See Question 6 on Statistical Review]
  ​Hourly rates for well service rigs are down 18% on average, with all respondents saying that continued low oil prices would create even more downward pressure on pricing throughout 2015.
  • Top-Tier Operator: “Rates are down 25% [QTQ], but suppliers are not going down. We bid on jobs but our suppliers are not going down. They will eventually, but they’re always the last ones to do it.”

• No New Competition
  [See Question 7 on Statistical Review]
  ​Seven respondents said that competition had not increased but one of the eight said that he had started to see some companies become more competitive on rates.
  • Mid-Tier Operator: “We are seeing competition starting to undercut prices by as much as 20%.”

• Holding Pattern is the new Strategy
  [See Question 8 on Statistical Review]
  ​Respondents said that they are taking a “wait-and-see” strategy for 2015. All agreed that if oil prices continue to be as low as they have been the last three months the situation would grow worse. However, strategies ranged from drilling wells with available capital and then not completing, to focusing on well service work that would be continuous even during a downturn, which meant less P&A and completion in favor of more workover and maintenance.
  • Mid-Tier Well Service Manager: “Many operators are sitting back and not completing and they may be trying to get the vendors down on the completion cost. Some will use capital to go in and drill a well, and depending on how the lease is written, just drilling may hold the lease for 180 days.”

Survey Demographics

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

Part II. – Statistical Review

Workover/Well Services

Total Respondents = 8
[Oil & Gas Operators = 6, Well Service Companies = 2]

1. Do you expect demand for workover rigs to grow, remain the same, or shrink in 1Q15 compared to 4Q14?
Remain the same: 1
Shrink: 7

2. Would you characterize the supply of rigs in your area as excessive, sufficient, or insufficient to meet the 1Q15 demand?
Excessive: 8

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 8

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 % 2
Down 10% 1
Down 15% 1
Down 17.5% 1
Down 20% 1
Down 22.5% 1
Down 25% 1
Average Down 18%

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 strategies are companies putting in place to cope with the low oil prices?
Completing wells, watching to see what happens 1
Plugging wells, doing workover/maintenance,
but not completions 2
Discounting rates 1
Operators not completing wells 3
Laying down more rigs 1