Service Providers See Bottom Early 2016

Synopsis

Is the industry nearing a bottom in demand for workover services? It’s an intriguing question in light of sub-$40 oil.

Three of every four respondents in the current Permian Basin workover survey said demand for workover services had stabilized, though at very low levels. However, survey participants have accepted the extended nature of the downturn with few seeing recovery soon unlike previous reports that showed some contractors expected the market to improve in the New Year.

In contrast, current survey participants see demand for workover services actually getting weaker in the first half of 2016. Operators continue to reduce spending to adjust to a cash flow neutral world with more spending cuts coming in the first half of the year.

Supporting evidence is found in the fact that more than 70% of Permian job mix is slated towards routine maintenance, up from 60% in the September report. Consequently, the region is characterized by excess capacity in the service sector with the public workover companies aggressively cutting pricing to capture market share.

Average hourly pricing has not changed materially in the Permian since the September report. Pricing ranges from $235 to $250 per hour for the popular 500 series rig. Meanwhile, the 400 series rigs remain unchanged at $235 an hour. There are reports of smaller contractors cutting prices below $200 to maintain revenue on the one or two rigs they have in the market.

The major change in this report is that operators are now completing the wells they drill. However, they aren’t drilling many wells.

Watch for the next Permian Basin workover update in March 2015.

Part I. – Survey Findings

Among Survey Participants:

• Rig Demand Remains Lackluster
  [See Question 1 on Statistical Review]
  Six of the eight respondents said that demand for well services and workover rigs was weak but had not gotten worse in the last three months, while two said that demand had weakened.
  • Mid-Tier Operator: “We are in flux like everyone else. Everyone said the last boom was different, but is this bust different? We thought we had seen the last of oversupply, but it turned out to be a fallacy. How will this bust be different than the last ones?”

• Number Of Rigs Excessive
  [See Question 2 on Statistical Review]
  There is an excessive amount of rigs in the Permian Basin, according to all respondents, and rigs continue to be stacked.
  • Mid-Tier Operator: “We have one rig running right now and we are hoping to keep it busy.”

• Only Necessary Maintenance Being Done
  [See Question 3 on Statistical Review]
  ​Among all respondents, routine maintenance on average accounts for 71% of work, as operators focus on only what is necessary in the Permian Basin. Completions account for 13%, plug and abandonment (P&A) work accounts for 10% and workover accounts for 6% of all work performed.
  • Mid-Tier Well Service Manager: “We are completing the wells we are drilling, but we only have one rig in operation.”

• Mostly Workover Rigs Vs. Coiled Tubing Units
  [See Question 4 on Statistical Review]
  ​Only one of the eight respondents said that they are using coiled tubing units instead of workover rigs. However, the one respondent said they only use the coiled tubing units on a limited basis compared to the majority of their work using workover rigs.
  • Mid-Tier Operator: “We use coiled tubing for very few projects.”

• Hourly Rates Vary Depending On Packages
  [See Question 5 on Statistical Review]
  ​The hourly rate for the popular size 500 HP series is $267 per hour, similar to findings in the September report and the rate for 400 HP workover rigs averaged $235 per hour, same as in September. See Table I for Average Hourly Rates.
  • Mid-Tier Well Service Manager: “There are some one and two rig operations that are charging $190 per hour for a 500 HP well service rig. The majority of the companies are charging $235 to $250.”

• Hourly Rates Expected To Be Flat Quarter-To-Quarter
  [See Question 6 on Statistical Review]
  ​Over the next quarter, all eight respondents said they do not expect hourly rates to go lower than they are currently. Two respondents said that while demand would not improve in the next three months, they anticipated it would not get worse.
  • Mid-Tier Operator: “I don't think we are going to see a major improvement in 2016. I don't think it will get worse though.”

• No New Competition
  [See Question 7 on Statistical Review]
  ​All eight respondents said that competition has not been a factor as most contractors had dropped their prices as low as they could go leaving little room for competition.
  • Mid-Tier Operator: “There is no new competition entering the Permian.”

• Companies Entering Into Survival Mode Phase
  [See Question 8 on Statistical Review]
  ​All eight respondents said that they do not expect that 2016 will show an improvement over 2015, and the six operators felt that the first six months of 2016 would actually be worse in year-to-year comparison. In addition, all respondents said that they are in survival mode and would be maintaining wells and controlling costs until demand turned around.
  • Mid-Tier Operator: “I can say with certainty that we will have low oil prices next year and for some that will kill them. It is amazing to me that there have not been more properties put on the market yet. There is some, but there is a lot that is not out there.”

• Lower Completions Mirror Lower Drilling
  [See Question 9 on Statistical Review]
  All eight respondents said that wells that are drilled are being completed, but that demand was weaker for both types of work.
  • Mid-Tier Operator: “We haven’t drilled any wells this year so we have not done any completions.”

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 six oil and gas operators and two managers with well service companies. Interviews were conducted during December 2015.

Part II. – Statistical Review

Workover/Well Services

[Permian Basin]

Total Respondents = 8

[Oil and gas operators = 6, Well service companies = 2]

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

2. Would you characterize the supply of rigs in your area as excessive, sufficient, or insufficient to meet the fourth-quarter 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 vs. workover rigs 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? By what percentage?

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?

9. What are you seeing in terms of the number of wells being drilled but not completed?

End Statistical Survey