Synopsis

Market turmoil continues in the Permian well service sector as some operators drill wells but delay completions, pending greater certainty in commodity pricing. Permian well service contractors have not been as hard hit as drilling contractors, but demand for service rigs is down versus the peak, taking pricing with it. Hourly pricing is down 18% on average versus the previous quarter for 500 series units in the Permian. Work mix is largely unchanged since last quarter other than an increase in rod and tubing work as a percentage of activity. Watch for the next Permian Basin well service report in June 2015.

Part I. – Survey Findings

Among Survey Participants:

  • Rig Demand Down QTQ
    [See Question 1 on Statistical Review]
    Seven of eight respondents said that 1Q15 rig demand is down for well servicing units in the Permian Basin area versus last quarter. Respondents observed well service demand was not being hit as hard as land drilling. One said that rig demand had stayed constant QTQ because they are maintaining their level of operation.
    • Mid-Tier Operator: “Well service is not down as much as land drilling, but we will see it. We have increased well count tenfold in the Permian and those wells continue to have trouble so workover companies have work. But we have seen a shift on prices on well service.”
  • Number of Rigs Excessive
    [See Question 2 on Statistical Review]
    ​All respondents said there is now an excessive amount of rigs in the Permian Basin area. Operators are seeking ways to control cost and are only doing what needs to be done.
    • Top-Tier Operator: “Well service and frac cost are coming down, but in my opinion, we can't play the unconventional resource game at under $50/barrel and until you get the frac cost down. A minimum of $65 to $70/barrel oil is what is needed to get some of these shale plays to work and until it gets there, there is no chance of making it economical.”
  • Routine Maintenance, Workovers Get Lion’s Share of Well Service Work
    [See Question 3 on Statistical Review]
    ​Among all respondents, maintenance on average accounts for 44% of work, completions account for 19%, plug and abandonment (P&A) work accounts for 6% and standard workovers account for 31% of all work performed.
    • Mid-Tier Operator: “Companies may be waiting for costs to come down a little more, so they are putting off plugging for a few months because you are using some of the same equipment that you use in workover and maintenance. “

Maintenance

Completion

P&A

Workover

50%

0%

0%

50%

25%

25%

25%

25%

50%

50%

0%

0%

40%

20%

0%

40%

45%

5%

5%

45%

45%

50%

5%

0%

45%

5%

10%

40%

50%

0%

0%

50%

Average 44%

Average 19%

Average 6%

Average 31%

  • 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.
    • Mid-Tier Operator: “We don’t use coiled tubing.”
  • Hourly Rates Consistent Among HP Series
    [See Question 5 on Statistical Review]
    ​The hourly rates for the popular size 500 HP series is $231/hour, which reflects the discount contractors are giving in response to the lower oil prices. See Table I for Average Hourly Rates.
    • Mid-Tier Operator: “We are hearing 20% price discounts are being given, but that is a moving target. Oil prices were down another $1.30 today. Every week when you see the rig report you know there is going to be a price war; service companies will have to lower price point or they will be idle. They are going to figure it out in a hurry.”
    • Table I. – Average Rates for Certain Workover Rig Sizes in the Permian Basin

Rig Size (HP)

Average Rate

400 HP Series

$230/hour

500 HP Series

$250/hour

  • 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.
    • Mid-Tier Operator: “Rates are down 25% [QTQ]. The well service rates lagged the drop in land drilling rates. If a well is not productive and not economic recently you might hold off on plugging it with the expectation that prices will come back.”
  • No New Competition
    [See Question 7 on Statistical Review]
    All respondents said that competition had not increased. Most companies are focusing on relationships and maintaining costs.
  • Strategies Vary Among Companies
    [See Question 8 on Statistical Review]
    ​Operators are focusing on different strategies while oil prices are low. Some are drilling out their contracts but not completing. Some are completing only the wells they have already drilled. Some continue to spend on maintenance and workover, while waiting on plugging and completion.
    • Top-Tier Operator: “Some efficiencies you might gain with a modern rig on the drilling cost but it’s the completion cost that is too high, and until we figure a way to get that down, we can't play that game. If oil prices go up and we do start playing, then this is potentially a more long-term problem.”
  • More Wells Not Being Completed
    [See Question 9 on Statistical Review]
    ​Half of the respondents said that operators are completing all of the wells that they are drilling, while the other half said that wells are being drilled but not completed as operators wait for oil prices to come back up or completion costs to go down further.
    • Mid-Tier Operator: “We have several wells that have the pipe set, but not completed. Rig rates are down but the rates are still not acceptable at $40 a barrel. It’s all a guess. Rates 30% to 40% lower would be the point to start to talking real money and doing completions, but it’s all rate of return driven. If price and cost aren’t there then the work won’t happen.”

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 seven oil and gas operators and one manager with a well service company. Interviews were conducted during March 2015.

End Survey Findings

Part II. – Statistical Review

Workover/Well Service

[Permian Basin]
Total Respondents = 8
[Oil & Gas Operators = 7, Well Service Companies = 1]

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?

Maintenance

Completion

P&A

Workover

50%

0%

0%

50%

25%

25%

25%

25%

50%

50%

0%

0%

40%

20%

0%

40%

45%

5%

5%

45%

45%

50%

5%

0%

45%

5%

10%

40%

50%

0%

0%

50%

Average 44%

Average 19%

Average 6%

Average 31%

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.]

Rig Size (HP)

Average Rate

400 HP Series

$250/hour

500 HP Series

$231/hour

6. Do you expect workover rig hourly rates to increase, remain the same or decrease over the next 3 months?
Down 10% 1
Down 15% 1
Down 20% 3
Down 22.5% 1
Down 25% 2
AVERAGE Down 20%

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?
Continue at same level, but cautious 2
Doing more maintenance and workover
vs. plugging and completions 2
Only drilling leaseholds 2
More rigs laid down 1
Stacking rigs and laying off employees 1

9. What are you seeing in terms of the number of wells being drilled but not completed?
Completing the wells we drilled and
watching to see what happens 2
Plugging wells, doing workover/maintenance,
but not completions 2
Not doing plugging or completions 2
Completing our wells hearing others
are not completing 2