Synopsis

A fourth-quarter blood bath? That’s the fear among Midcontinent well servicing firms.

The theory is that the expiration of hedges in 2015 will knock the foundation out of the small amount of activity still underway in the region.

Operators are slow walking payment for oil field services and postponing new work. Some smaller well service firms have ceased operation and more appear on threshold. There isn’t much good news in the Midcontinent at oil prices below $50.

One manifestation of the depressed market is that routine maintenance now accounts for more than 80% of job mix among well servicing contractors participating in the current Hart Energy survey.

Meanwhile, there have been so many layoffs that a lack of personnel will prevent well service contractors from responding in a timely manner if market conditions improve.

Hourly rates weakened 9% over the last 90 days and are down to $263 for the benchmark 500 series workover unit.

Watch for the next well service sector Midcontinent report in January 2016.

Part I. – Survey Findings

Among Survey Participants:

  • Rig Demand Weakens
    [See Question 1 on Statistical Review]
    All eight respondents said that demand for well services and workover rigs had weakened quarter-to-quarter. This was a change from the July report when the same respondents had seen demand stabilize, albeit at low levels.
    • Mid-Tier Well Service Manager: “I think it all went down since July. Sixty dollar oil then and now we are dealing with $45 oil and all of the positive things we were hearing then have completely turned around. One of the big well servicing companies said it would be a bloodbath in the fourth quarter of 2015 because any activity we have had was due to hedged prices.”
  • Number Of Rigs Excessive
    [See Question 2 on Statistical Review]
    ​The number of rigs available for work in the Midcontinent area exceeds the demand. Respondents said that this would continue into 2016.
    • Mid-Tier Well Service Manager: “I don't think things are finished with getting worse. We are still running and I just got off the phone with a friend who had 10 rigs who shut his company down. I'm calling customers begging for money and those customers have put us on 90 to 120 day cycles and so cash flow is a problem. We are at 40% of what we were at a while ago. We are working pretty hard to get that 40% and not very profitable. I told a guy if I gave you the rig would you go do anything and he said no. So it's not just the price.”
  • Well Service Companies Focusing On Maintenance
    [See Question 3 on Statistical Review]
    ​Among all respondents, maintenance on average accounts for 82% of work, as operators focus on only what is necessary in the Midcontinent area. Completions account for 6%, plug and abandonment (P&A) work accounts for 4% and workover accounts for 8% of all work performed.
    • Mid-Tier Well Service Manager: “We are starting to plug wells because they weren't making money at $100 a barrel and now they are getting plugged and hauling the equipment back to their yards and if they need equipment they are taking from that pile. Most of the rigs are at a shutdown point.”

Maintenance

Completion

P&A

Workover

70%

10%

10%

10%

80%

10%

5%

10%

80%

0%

10%

10%

80%

10%

0%

10%

90%

0%

5%

5%

90%

10%

0%

0%

90%

0%

0%

10%

80%

5%

0%

15%

Average 82%

Average 6%

Average 4%

Average 8%

  • Workover Widely Used Vs. Coiled Tubing
    [See Question 4 on Statistical Review]
    ​None of the eight respondents are using coiled tubing units. All said they used workover rigs to do well service jobs in the Midcontinent area. Two respondents said they had heard that coiled tubing prices were very low, but that still was not an incentive to use it in the area.
    • Mid-Tier Well Service Manager: “It doesn’t matter what you are using. When it does turn the corner, it won’t be an equipment issue it will be a people problem like we have never seen before.”
  • Hourly Rates Vary Depending On Relationships
    [See Question 5 on Statistical Review]
    The hourly rate for the popular size 500 HP series is $264 per hour on average, which represents the year-to-year discounts that operators have demanded and is slightly lower than the $283 per hour average rate cited in the July report. In addition, the 300-HP and 400-HP rates have slipped from July, though the 200-HP rate remains the same. See Table I below for average hourly rates.
    • Mid-Tier Well Service Manager: “Generally people wanted to believe that we might improve from June or July but obviously this last dip we took has caused a lot of people to rethink that position. There are not a lot of people subscribing to oil prices being at $70 before end of year. Back in the spring, operators were thinking they could hang on and the price improvement would happen but a lot of service companies have realized it is not going to be any better.”

Table I. – Average Rates For Certain Workover Rig Sizes In The Midcontinent

Rig Size (HP)

Average Rate

200 HP Series

$190/hour

300 HP Series

$200/hour

400 HP Series

$210/hour

500 HP Series

$264/hour

  • Hourly Rates Expected To Be Flat
    [See Question 6 on Statistical Review]
    ​While demand has weakened recently, all eight respondents expect hourly rates for workover rigs to remain flat during the next three months.
    • Mid-Tier Operator: “Contractors are throwing the towel in. Companies are going under and rates can't go any lower than they are right now.”
  • Competition Not Heating Up
    [See Question 7 on Statistical Review]
    ​All eight respondents said that competition has not been a factor as most contractors had dropped prices as low as they could go.
    • Mid-Tier Well Service Manager: “I know a guy who owns an oil company and we were talking about how frack jobs and drilling rigs are the two most overpriced parts of the industry. People in the roustabout and workover [sectors] can never get those margins. It would be unheard of to get 30%.”
  • Strategy Is Not To Drop Price Further
    [See Question 8 on Statistical Review]
    ​The majority of the respondents said that they could not lower prices any more to compete in the market. Four said they would not lower prices, three said they are going to try to ride out this downturn as is and one said they are scrapping older rigs to improve their inventory for when things turn around.
    • Mid-Tier Well Service Manager: “We have some other rental companies that are as low as 20% utilization, but our rigs are maybe at 40%. We're pretty fortunate with the customers we have. We're getting rid of older rigs and scrapping them. We started doing that a long time ago but stepping it up—not auctioning off and selling but taking it out of the market. We just want it out of the market and the rigs we want to go back to work with are the most efficient.”
  • Wells Are Completed
    [See Question 9 on Statistical Review]
    All respondents are completing whatever wells are being drilled, but drilling has slowed down considerably in the Midcontinent area as a response to lower oil prices and uncertainty in the market.
    • Mid-Tier Operator: “We are completing every well we drill but we haven’t drilled in the last six months.”

End Survey Findings

Survey Demographics

H A R T E N E R G Y researchers completed interviews with ten industry participants in the workover/well service segment in the Midcontinent area. Participants included two oil and gas operators and six managers with well service companies. Interviews were conducted during mid to late September 2015.

Part II. – Statistical Review

Workover/Well Services

[Midcontinent]

Total Respondents = 8

[Oil & Gas Operators = 2, Well Service Companies = 6]

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

Shrink:

8


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

70%

10%

10%

10%

80%

10%

5%

10%

80%

0%

10%

10%

80%

10%

0%

10%

90%

0%

5%

5%

90%

10%

0%

0%

90%

0%

0%

10%

80%

5%

0%

15%

Average 82%

Average 6%

Average 4%

Average 8%


4. What percentage of work is done by coiled tubing units vs. workover rigs in the Midcontinent area?

Workover rigs:

100%

Coiled tubing units:

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

200 HP Series

$190/hour

300 HP Series

$200/hour

400 HP Series

$210/hour

500 HP Series

$264/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

AVERAGE:

Flat


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?

Scrapping older rigs:

1

Not dropping prices further:

4

Remain steady during the downturn:

3


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

Not much drilling taking place, but all are completed:

8


End Statistical Survey