Synopsis

The recent drop in oil prices has snipped incremental demand increases for Midcontinent workover activity in the bud. The market stabilized in second-quarter 2015, showed slight interest in increased completions as operators worked through the backlog of drilled but uncompleted wells, but is now back to a week-to-week demand basis centering on routine well maintenance for contractors. Pricing was listed as stable for the benchmark 500 series workover unit at $283 per hour in mid-July, down from $344 in the April Midcontinent survey. Overall, pricing is down 20% to 25% in the first half of 2015. Contractors are concerned that another pullback in activity will leave the industry challenged going forward as experienced labor eschews the oil and gas industry out of exhaustion from the constant cycle of intense work during the booms followed by layoffs. From a labor expertise standpoint, workover contractors note the industry is melting away and will experience challenges when demand kicks in—an event now expected to be postponed until 2016. Watch for the next Midcontinent workover update in October 2015.

Part I. – Survey Findings

Among Survey Participants:

  • Rig Demand Steady
    [See Question 1 on Statistical Review]
    ​Ten respondents said that demand had remained steady in the Midcontinent area quarter-to-quarter. However, most expressed concern about the recent drop in oil prices as well as the upcoming decision with Iran.
    • Mid-Tier Well Service Manager: “[The market] felt like it was stabilizing, but then we had the worst June I've ever had on the books. So it looks good this week, but it's one of those week by week things now.”
  • Number Of Rigs Excessive
    [See Question 2 on Statistical Review]
    ​All of the respondents said that there continues to be an excessive amount of rigs in the Midcontinent area, as operators are seeking ways to control cost and are only doing what work is necessary.
    • Mid-Tier Well Service Manager: “I’m not sure in our area if there are more rigs to lay down; there are still some activity, one major is picking one up, another midsize is picking up one or two, so the rig count has stabilized for the last month. We had 16 rigs running. One group said they were speaking to contractors and the phone was ringing a bit, not ready to put rigs out. And now there has been a drop in oil prices. We have seen a little bit of a spike but it’s mainly due to our customers, those that have ongoing drilling activity. We are fortunate to have our clients.”
  • Routine Maintenance Accounts For Nearly Half Of Rig Workloads
    [See Question 3 on Statistical Review]
    ​Among all respondents, routine maintenance on average accounts for 48% of work. Completions account for 19%, plug and abandonment (P&A) work accounts for 10% and standard well service work accounts for 23% of all work performed.
    • Mid-Tier Well Service Manager: “When it got up to $50 a barrel, we had completed some new wells, but now we are back to mainly casing leaks, disposal wells, injection well workovers, and a lot of maintenance.”

Maintenance

Completion

P&A

Workover

25%

25%

25%

25%

25%

25%

25%

25%

25%

25%

25%

25%

80%

5%

0%

15%

80%

0%

0%

20%

0%

40%

0%

60%

80%

10%

0%

10%

55%

40%

5%

0%

80%

0%

0%

20%

25%

25%

25%

25%

Avg. 48%

Avg. 19%

Avg. 10%

Avg. 23%

  • Workover Rigs Dominate
    [See Question 4 on Statistical Review]
    ​Nine of the 10 respondents work 100% with workover rigs and stick pipe in lieu of coiled tubing (CT) units. CT units have historically been higher priced than workover rigs, and even with the prices coming down off of their premiums, workover rigs are still favored by all of the respondents. The respondent who has used the CT unit said he used them during peak times, but was not using them now.
    • Mid-Tier Well Service Manager: “We have not been around a CT rig in years because there is very little horizontal in this area. We tried it but it wasn't profitable.”
  • Hourly Rates Average $302/Hour
    [See Question 5 on Statistical Review]
    ​The hourly rate for the benchmark 500 HP series is $283/hour on average, which reflects the discount contractors are giving in response to the lower oil prices. Rates were flat quarter-to-quarter after having fallen 20% to 25% earlier. See Table I for Average Hourly Rates.
    • Mid-Tier Well Service Manager: “We actually have as many rigs as we can out there but there is no backlog.”

Table I. – Average Rates For Certain
Workover Rig Sizes In The Midcontinent

Rig Size (HP)

Average Rate

200 HP Series

$190/hour

300 HP Series

$224/hour

400 HP Series

$229/hour

500 HP Series

$283/hour

  • Hourly Rates Flat Quarter-To-Quarter
    [See Question 6 on Statistical Review]
    ​Hourly rates are flat quarter-to-quarter according to all respondents who said that rates have not dropped further in the last month and are not expected to drop in the next three months.
    • Mid-Tier Well Service Manager: “It has somewhat stabilized but I am seeing people get back to work and I know they won't have the money to continue. It is a contracting market and there are still more rigs that will be stacked. The whole infrastructure is melting. We are losing expertise with layoffs and these people will never come back because everyone is exhausted from the up and down cycles.”
  • No New Competition
    [See Question 7 on Statistical Review]
    ​There is no new competition entering the Midcontinent area according to all respondents. Existing companies are lowering their rates to compete, but even the discounting of rates has abated in the last few weeks.
    • Mid-Tier Operator: “There is no new competition.”
  • Cost Control Important During Downturn
    [See Question 8 on Statistical Review]
    ​All respondents said that they were hoping to control costs and maintain them during the downturn. Five respondents expressed concern about keeping good employees as well.
    • Mid-Tier Well Service Manager: “It is a maintain thing. The only thing we are trying to do is pay the light bill and keep our help intact because maybe we might see some price increases at the beginning of the new year. The labor shortage is going to be brutal.”
  • Respondents Mixed On Well Completions
    [See Question 9 on Statistical Review]
    ​Five of the 10 respondents said they are completing every well they drilled, but five have heard that wells area not being completed because of the low price of oil.
    • Mid-Tier Well Service Manager: “I think we are on target that third-quarter would stabilize a bit and—if it does—we may see an uptick. We are not looking for drilling rigs to go back up, but for workover work to pick-up. I do know an independent not completing wells because they are waiting for the prices of oil to rebound.”

End Survey Findings

Survey Demographics

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

Part II. – Statistical Review

Workover/Well Services

[Midcontinent]

Total Respondents = 10

[Oil & Gas Operators = 3, Well Service Companies = 7]

1. Do you expect demand for workover rigs to grow, remain the same, or shrink in third-quarter 2015 compared to the second quarter?
Remain the same: 10

2. Would you characterize the supply of rigs in your area as excessive, sufficient, or insufficient to meet third-quarter 2015 demand?
Excessive: 10

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

Maintenance

Completion

P&A

Workover

25%

25%

25%

25%

25%

25%

25%

25%

25%

25%

25%

25%

80%

5%

0%

15%

80%

0%

0%

20%

0%

40%

0%

60%

80%

10%

0%

10%

55%

40%

5%

0%

80%

0%

0%

20%

25%

25%

25%

25%

Avg. 48%

Avg. 19%

Avg. 10%

Avg. 23%


4. Which type of well service equipment is gaining share in completions—coiled tubing (CT) units or workover rigs? What percentage of completion work is being done by coiled tubing units vs. workover rigs?
100% of work completed by workover rigs: 9
CT units used during upcycle only: 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.]

Rig Size

Average Rate

200 HP Series

$190/hour

300 HP Series

$224/hour

400 HP Series

$229/hour

500 HP Series

$283/hour


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

Flat 0%:

10

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: 10

8. What strategies are companies putting in place to cope with the low oil prices?
Keep costs down and maintain cost controls: 7
Stay the same until oil prices go up: 3

9. What are you seeing in terms of the number of wells being drilled but not completed?
Wells are all being completed: 5
Have heard of some companies not completing: 5

End Statistical Survey