Synopsis

The commodity price downturn is prompting price reductions among well service contractors in the greater Rockies outside the Williston Basin. In mid-January 2015, service providers report rates down about 10% quarter-to-quarter, similar to reports elsewhere in the oil patch as operators push the service sector for cost reduction. Meanwhile, larger service providers worry about further rate cutting from local, privately-held contractors. Rate reductions have not yet translated to reduction in wages for hands, although expectations are that pricing is going to drop further on the basis of lower commodity prices.

Watch for the next well servicing report for the greater Rockies in April 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 demand had dropped in 1Q15 vs 4Q14 and all but one blamed lower oil prices for the slowing. One respondent that had seen a slowdown in demand said it was because they had finished all of their completion work. The respondent who had not seen an effect on demand said that their work was steady, but they were hearing of others slowing down.
    • Mid-Tier Well Service Manager: “We are seeing demand slow for rigs and prices are being reduced. Operators are asking for 20% reductions, some are asking for 30% and they may get it. The greater reductions will be from people who are local because they don't have the overhead expense. The service won’t be as good. On average, operators may get 15% of that 30% they are seeking in reductions.”
  • Number of Rigs Sufficient [See Question 2 on Statistical Review]. Six of the eight respondents said that the workover rig inventory is excessive for the current demand, while two said that it is sufficient but tipping toward excessive.
    • Mid-Tier Operator: “Operators here are basically focusing on the higher production wells and going to ignore the lower ones. We have heard companies are laying down workover rigs. One company is going from 17 to 13.”
  • Well Service Work Weighted Toward Standard Workovers and Routine Maintenance [See Question 3 on Statistical Review]. Among all respondents, standard workover work accounts for 34% on average, routine maintenance accounts for 34%, plug and abandonment (P&A) accounts for 16% and completion work accounts for 16%.
    • Mid-Tier Well Service Manager: “Our work slowed because we finished our completion work so the client gave us some production work to keep us steady till we finish this fracking job.”

  • Use of Coiled Tubing Not Growing [See Question 4 on Statistical Review]. None of the respondents were using coiled tubing and did not expect use to grow in the area.
  • Hourly Rates Consistent Among HP Series [See Question 5 on Statistical Review]. Most workover rig horsepower falls within the range of the 500 series. The 500 HP hourly rates average $310 to $400/hour depending on what ancillary equipment is contracted. See Table II for Average Hourly Rates.

  • Hourly Rates Down QTQ [See Question 6 on Statistical Review]. All but one respondent said that prices are lower 10% QTQ due to lower oil prices. Rates are expected to dive further in 2015 if oil prices do not climb back up. One respondent believed rates would stabilize and move up in the next couple of months.
    • Mid-Tier Well Service Manager: “Price concessions are being requested and we are shooting for 10% reductions with our clients; some have accepted and some we have not heard back from yet. It is still early in the day. Right now, my crystal ball says things look really, really bad. I hate to say where we're going to be if oil prices don’t come back up. Once you start cutting prices, even if the industry turns around, it takes a while to get that pricing back.”
  • 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, given lower oil prices.
    • Mid-Tier Well Service Manager: “We worry about the small local companies undercutting prices but we are not seeing anything now.”
  • 2015 Rates Under Pressure [See Question 8 on Statistical Review]. Five of the eight respondents said 2015 would see further reductions in demand and hourly rates and even labor rates if the price of oil did not rise. One respondent said that “iron would start laying down” if oil prices did not rise. One respondent said he expects that work demand would come back up after a couple of months as everyone adjusted.
    • Manager for Mid-Tier Well Service Company: “As a company, we have backed off our growth budget for 2015 and our capex has been nixed. We implemented a 10% reduction in our rates. We are just going to lower rates not wages, because we can buy equipment and leave it sit, but if you do that with people, they starve.”

Survey Demographics

Hart Energy researchers completed interviews with nine industry participants in the workover/well service segment in areas of the Rocky Mountains outside of the Bakken Shale play. Participants included one oil and gas operator and seven managers with well service companies. Interviews were conducted during January 2015.

Part II. – Statistical Review

Workover/Well Service – [Other Rockies] Total Respondents = 8 [Oil & Gas Operators = 1, Well Service Companies = 7]

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 4Q14 demand?

Sufficient: 2

Excessive: 6

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?

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? By what %?

Remain the same (0%): 1

Down (no %): 1

Down 10% 4

Down 12.5% 1

Down 15% 1

AVERAGE: Down 10%

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: 5

Rigs will stack up: 1

Steady because we have a big client: 1

Believe it will turn around in two months: 1