Synopsis

The ‘winter of discontent’ continues for Permian Basin workover providers.

Most say demand has stabilized, but at very low levels. It is the same story heard in all workover markets around the U.S.

The story comes with reports of further layoffs, skeleton organizations, and continuing economic duress for the smallest service providers. Some are not likely to make it to the other side if the lack of demand for workover services continues into the second half of the year.

The story also includes another leg downward in hourly rates even as contractors insist every 90 days that rates cannot go lower. The last 90 days have seen average hourly rates drop 5%.

One interesting development is that workover providers believe activity would increase at sub-$50 oil, which is lower than estimates for most other markets. Elsewhere, most believe the threshold ranges between $50 and $55 per barrel and some operators comment that oil needs to rise above $60 on a sustained basis before activity increases.

Routine maintenance now accounts for 80% of job mix as operators do only what is absolutely necessary to get through the current downturn.

Watch for the next Heard In The Field report on the Permian Basin workover market in June 2016.

Part I. – Survey Findings

Among Survey Participants:

  • Workover Demand Stagnates
    [See Question 1 on Statistical Review]
    ​Seven respondents said that demand had stabilized at low levels over the last 90 days, but had not weakened. One respondent said that demand continued to decline.
    • Mid-Tier Well Service Manager: “Everyone is laying people off and they are out collecting unemployment and if they need someone they just call them back in for a few days.”
  • More Well Service Work May Kick-In At $43 Oil
    [See Question 2 on Statistical Review]
    ​Survey respondents said oil price would need to stabilize at $43 for demand to increase for more well service work. Respondents were mixed on what the per barrel price of oil would need to be for well service demand to expand with a range of $20 on the low end to $55 on the high end mentioned.
    • Top-Tier Well Service Manager: “I don't even know what oil would have to be to turn things around. For us, cash flow is the issue for our company.”
  • Natural Gas Prices Need To Average ~$2.75 For More Activity To Occur
    [See Question 3 on Statistical Review]
    ​Four respondents quantified natural gas prices ranging from $2 to $3.75 for more well service work to occur. Others are simply watching the oil price for activity to increase.
    • Mid-Tier Operator: “Gas prices are associated with oil prices for us, so we won’t get moving on an opportunity unless oil prices are where we need them to be.”
  • Necessary Maintenance Only
    [See Question 4 on Statistical Review]
    Among all respondents, routine maintenance on average accounts for 80% of work, as operators focus on only what is necessary in the Permian Basin. Completions account for 7%, plug and abandonment (P&A) work accounts for 13%. None of the respondents are doing any standard workovers. These ratios are a slight change from December when routine maintenance accounted for 71% of work, completions were 13%, P&A’s were 10% and standard workovers were 6% of all work performed.

Maintenance

Completion

P&A

Workover

100%

0%

0%

0%

90%

10%

0%

0%

100%

0%

0%

0%

90%

10%

0%

0%

80%

20%

0%

0%

0%

0%

100%

0%

75%

20%

5%

0%

100%

0%

0%

0%

Average 80%

Average 7%

Average 13%

Average 0%

  • Average 500-HP Hourly Rate Slips Again
    [See Question 5 on Statistical Review]
    ​The hourly rate for the benchmark 500 horsepower (hp) series is $253 per hour on average, down from $267 per hour in December. The 400 hp series average rate is $235 per hour, same as in December. See Table I for average hourly rates.
    • Mid-Tier Operator: “Everyone I know is slowing way down, so not seeing a lot of work out there even at lower prices.”

Table I. – Average Rates For
Permian Workover Rigs

Rig Size (hp)

Average Rate

400 hp series

$235/hour

500 hp series

$253/hour

  • Hourly Rates Expected To Be Flat Quarter-To-Quarter
    [See Question 6 on Statistical Review]
    ​Rates are expected to remain flat, but very low during the next three months. Respondents said there is no catalyst for higher hourly rates when activity is so low.
    • Mid-Tier Operator: “Companies are cutting to the bare bone and laying people off. There is not a lot of work out there.”
  • Active Companies Operating Lower Capacity
    [See Question 7 on Statistical Review]
    Six respondents said that while some workover companies remain active in the Permian, they are reducing staff and cutting costs to the bare bone. Several respondents said activity is at a bare minimum compared to 18 months ago.
  • Respondents Report No Workover Companies Leaving Area Or Going Out Of Business
    [See Question 8 and 9 on Statistical Review]
    Although six of the eight respondents said that they have not heard of any company leaving the Permian, two said they believe some small well service companies are shutting down. Respondents agreed that there have not been a lot of bankruptcies yet, but that most companies are operating with a skeletal crew and some are fragile enough not to endure six more months of this downturn.

End Survey Findings

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 Permian Basin. Participants included seven oil and gas operators and one manager with a well service company. Interviews were conducted during early to mid-March 2016.

Part II. – Statistical Review

Workover/Well Services

[Permian Basin]

Total Respondents = 8

[Oil and gas operators = 7, Well service companies = 1]

1. Do you expect demand for workover rigs to grow, remain the same, or shrink in first-quarter 2016 compared to the fourth quarter of 2015?

Remain the same:

7

Shrink:

1


2. What would oil prices have to be for demand for workovers to improve?

$20 if costs come down:

1

$35:

1

$45:

1

$50:

1

$55:

2

Depends on cash flow and company:

2

Average:

$43


3. What would natural gas prices have to be for demand for workover rigs to improve?

$2:

1

$2.25:

1

$3:

1

$3.75:

1

Gas price goes hand-in-hand with oil price:

2

What they are today, some markets still work:

1

Don’t know:

1

Average:

$2.75


4. Looking at your slate of well service work, how much of it is workover vs. routine maintenance vs. plug and abandonment (P&A) vs. completion work?

Maintenance

Completion

P&A

Workover

100%

0%

0%

0%

90%

10%

0%

0%

100%

0%

0%

0%

90%

10%

0%

0%

80%

20%

0%

0%

0%

0%

100%

0%

75%

20%

5%

0%

100%

0%

0%

0%

Average 80%

Average 7%

Average 13%

Average 0%


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

Rig Size (hp)

Average Rate

400 hp series

$235/hour

500 hp series

$253/hour

[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 three months?

Flat 0%:

8


7. Which workover companies are the most active in your area during the downturn?

Everyone slowing down:

6

Not sure:

2


8. Are there any well service companies that have left your area?

None mentioned:

6

Small well service companies shutting down:

2


9. Are there any well service companies that have gone out of business in your area?

Not yet:

7

Small service companies in debt:

1


End Statistical Survey