Pricing Falls As Market Retrenches

Synopsis

It was fun while it lasted: Early indications of incremental demand increases for workover services in the Permian Basin in June have given way to the cold reality of July’s commodity price drop. This may be the beginning of a new round of pain for contractors.

The emphasis is on “may” since operators are taking a wait-and-see attitude to finish out 2015, quietly hoping commodity prices recover enough to increase demand for maintenance services when 2016 arrives.

Horizontal drilling continues, though at lower levels while vertical drilling has come to a halt. Hourly rates for the benchmark 500 Series workover unit continue to fall—now down on average another $10 per hour to $258 among survey respondents—and hourly rates are flirting with dropping below cash costs.

Operators are re-assessing programs as they focus once again on capital efficiency. While work is scarce, several operators say they will do what they can to maintain relationships with long-term workover service providers.

Watch for the next Permian Basin workover report in December 2015.

Part I. – Survey Findings

Among Survey Participants:

• Rig Demand Softens Quarter-To-Quarter
  [See Question 1 on Statistical Review]
  ​After stabilizing earlier this year, three respondents out of eight said that demand since the June report had weakened due to lower oil prices as well as bad news coming from the global financial world. Another five respondents said demand was the same quarter-to-quarter. Three respondents feared outlook would grow dimmer in the coming months.
  • Mid-Tier Operator: “I don't consider things to be worse. They are certainly not good. The service companies have redone their pricing structure to help. Obviously, this last drop in [oil] pricing caught folks off guard. But, more than anything, what I see is a wait-and-see attitude to see if it could go right back up. Now we are seeing yo-yoing. No one really knows what to think of oil prices. The world doesn't know what the price should be.”

• 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 Permian Basin area, as operators are seeking ways to control cost and are only doing what work is necessary.
  • Top-Tier Operator: “We are seeing no vertical drilling at all, but there is still horizontal drilling going on due to the good wells in this area and up towards Midland, between Big Lake and Midland. Having no vertical wells takes away from a lot of activity and there are people with rigs in the well service business that are stacking them in the yard every day. There’s probably 12 to 13 rigs in Big Lake today.”

• Well Service Companies Focusing On Maintenance
  [See Question 3 on Statistical Review]
  ​Among all respondents, routine maintenance on average accounts for 60% of work, as operators focus on only what is necessary in the Permian Basin area. Completions account for 22%, plug and abandonment (P&A) work accounts for 12% and workover accounts for 6% of all work performed.
  • Mid-Tier Well Service Manager: “We have two rigs down and haven't had any down all year.”

• Use Of Coiled Tubing Not Growing
  [See Question 4 on Statistical Review]
  ​Only one of the eight respondents was using coiled tubing units instead of workover for completions. This respondent said he only uses coiled tubing for a specific part of the completion job so it does not matter that prices have become more competitive.
  • Mid-Tier Well Service Manager: “We do utilize coiled tubing, but we are selective in what we use it for. It makes sense in certain events during the completion process but the benefits of lower pricing don't outweigh the reasons we do use it. We’re about 90% workover and 10% coiled tubing.”

• Hourly Rates Down From Early 2015
  [See Question 5 on Statistical Review]
  ​The hourly rate for the popular size 500 HP series is $258 per hour on average which is down from the average rate of $300 charged at the beginning of 2015. See Table I for Average Hourly Rates.
  • Mid-Tier Well Service Manager: “Rates for the rigs are down. They were at $300, then $250, now $235. We are at the point that if we go much lower at all we will be at red numbers and we can't afford that. The oil companies have hedged oil at $85/barrel and we are $75 cheaper than we were.”

• Hourly Rates Flat
  [See Question 6 on Statistical Review]
  ​While demand has weakened quarter-to-quarter, seven of the eight respondents said that rates could not go much lower because they were already hovering at cost. One respondent disagreed and said this softer environment might force companies to come down further.
  • Mid-Tier Well Service Manager: “Prices can't come down a whole lot more because there are fixed costs that you are not going to be able to change. You have had some drop in hourly wages in well servicing side for sure, but insurance rates are still climbing every year. We just have no control over that.”

• Little Competition In A Weak Industry
  [See Question 7 on Statistical Review]
  ​None of the respondents said that competition has picked up in the last three months. All cited lower oil prices, break-even rig rates, and not enough demand to spur any competition.
  • Mid-Tier Operator: “We continue to bid and monitor prices and if we have to switch for a lower price, we might but we have good contractors that we've been with before so we don't want to throw that away because they've been with us through thick and thin. But we don't want to pay something that's unreasonable either.”

• Hold Tight Is The Key Strategy
  [See Question 8 on Statistical Review]
  ​Respondents were unanimous in saying that “wait and see” is the marching order for the rest of this year. In addition, controlling costs and tightening belts even further were the strategies at hand.
  • Mid-Tier Operator: “We are going to tighten our belts and not do as much drilling as we have been. It's not unhealthy because we were blowing so hard and so much money was coming in here that we were losing our efficiency levels. Now we can recollect and think about how to do it better. We'll see some folks struggling over the next 12 months especially those who are highly leveraged because I don’t see a recovery of prices to any major extent in the next 12 months unless of course a geopolitical war or event changes, which can happen in a heartbeat. From the standpoint of the independents in the Permian, we will slow down, but will take the opportunity to improve some of our older production.”

• Most Wells Are Completed
  [See Question 9 on Statistical Review]
  ​Only one respondent of the eight said that he was hearing that wells were not being completed as operators wait for the price of oil to come back. The two workover respondents said that completion work has fallen off considerably in 2015.
  • Mid-Tier Operator: “We may delay some more completions if not absolutely necessary and hope the product price goes back up.”

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 area. Participants included six oil and gas operators and two managers with well service companies. Interviews were conducted during early September 2015.

Part II. – Statistical Review

Workover/Well Services

[Permian Basin]

Total Respondents = 8

[Oil & Gas Operators = 4, Well Service Companies = 4]

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

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

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. What percentage of work is done by coiled tubing units in the Permian Basin?

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

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

7. Have you noticed competitors from other regions entering your area? What has been the effect on your fleet's utilization and hourly rates?

8. What strategies are companies putting in place to cope with the low oil prices?

End Statistical Survey