Well Service Activity Moves At Glacial Pace In Midcontinent

Synopsis

Operators have joined service providers in using terms like “survival mode” when it comes to 2016 in the Midcontinent.

Activity levels are down as much as 75% in some instances vs. the peak in late 2014. With commodity prices back to 2003 levels, both service providers and operators are struggling to find ways to operate at 2003 levels, but are not there yet.

Little is being done in the field. When activity does occur, routine maintenance accounts for 88% of job mix. This appears to be the highest percentage of routine maintenance as a main activity driver for any market in the domestic landscape, though most other markets are not far behind.

With the completions market dissipating, there is little work for coil tubing units.

Operators are no longer asking contractors for price concessions; rather, they are opting not to do any activity at all (outside of maintenance operations—and only as necessary) as the industry hunkers down to outlast the market.

Watch for the next Midcontinent well service report in April 2016.

Part I. – Survey Findings

Among Survey Participants:

• Rig Demand Remains Lackluster
  [See Question 1 on Statistical Review]
  ​All nine respondents said that demand had not fallen in the past three months, but remained low due to low commodity prices and a cautious work environment.
  • Top-Tier Operator: “We are doing okay, but we've reduced our activity level and are trying to get in survival mode. This is our corporate objective right now. Compared to peak, our activity level is one quarter of what it was.”

• Excessive Inventory
  [See Question 2 on Statistical Review]
  ​There is an excessive amount of rigs in the Midcontinent area according to all respondents, and rigs continue to be stacked.
  • Mid-Tier Well Service Manager: “I have a total of 16 rigs in my operation and I have nine in the yard. We had a deal last week and I met with my guys and said if oil is at 2003 levels we need to go back to 2003 levels. We made money in '03.”

• Only Necessary Maintenance Being Done
  [See Question 3 on Statistical Review]
  ​Among all respondents, routine maintenance on average accounts for 88% of work, as operators focus on only what is necessary in the Midcontinent area. Completions account for 4%, plug and abandonment (P&A) work accounts for 3% and workover accounts for 15% of all work performed.
  • Mid-Tier Well Service Manager: “We've got some work going on, but last year our sales were down 35% and we're down probably another 10% to 12% year to year in 2016. We haul water and have well service rigs and are doing a little in each of those areas.”

• Workover Rigs Dominate Over Coiled Tubing Units
  [See Question 4 on Statistical Review]
  ​None of the respondents are using coiled tubing in the Midcontinent area.
  • Mid-Tier Well Service Manager: “Our service does not include coiled tubing units. We would compete with coiled tubing units, but not seeing more competition. We are not doing any completions in our area on new wells and that is where you would see coiled tubing units.”

• Hourly Rates Vary Depending On Packages
  [See Question 5 on Statistical Review]
  ​The rate span for the benchmark 500 series C rig ranges from $150 per hour to $270 per hour. See Table I for average hourly rates.
  • Mid-Tier Well Service Manager: “The situation is not good. Out of a fleet of 10, we have two out and we are hanging on that. They lowered rates last year. Rates are between $145 to $150 for a 500 series unit. Operators haven't asked to go lower instead they are just shutting things in. They are not going to work on their well. It would take six months to payback a pump.”

• Hourly Rates Flat
  [See Question 6 on Statistical Review]
  ​Rates are flat quarter-to-quarter in the Midcontinent and all nine respondents said that rates are already at rock bottom.
  • Mid-Tier Well Service Manager: “Long-term projects are still going. We are moving equipment, but it could change at any moment. We are real cautious and still making adjustments in head count. We are trying to make all the adjustments to survive. We are not going to put equipment to work when we can't make money. We are shedding people and costs instead.”

• No New Competition
  [See Question 7 on Statistical Review]
  ​There is no new competition as demand for well services is slowing to match the lowered demand of land drilling.
  • Mid-Tier Operator: “There is no new competition entering the Midcontinent area.”

• Control Costs Is The 2016 Mantra
  [See Question 8 on Statistical Review]
  ​Controlling costs and reducing labor are the marching orders for two companies in 2016. Five respondents are going to try to continue to work, but at a greatly reduced capacity, while two respondents said they are going to shut down until prices go up.
  • Top-Tier Well Service Manager: “We are going to work on maintenance only on account of the regulatory environment or mechanical integrity of the well.”

• Low Expectations For Drilling And Completions In 2016
  [See Question 9 on Statistical Review]
  ​Drilling and completions in 2016 are expected to be slow and respondents are gearing up for a challenging year in terms of work demand and rates.
  • Mid-Tier Operator: “ When we start seeing prices improve, we will see some general optimism.”

End Survey Findings

Survey Demographics

H A R T E N E R G Y researchers completed interviews with nine industry participants in the workover/well service segment in the Midcontinent area. Participants included five oil and gas operators and four managers with a well service company. Interviews were conducted during January 2016.

Part II. – Statistical Review

Workover/Well Services

[Midcontinent]

Total Respondents = 9

[Oil and gas operators = 5, Well service companies = 4]

1. Do you expect demand for workover rigs to grow, remain the same, or shrink in first-quarter 2016 compared to the fourth quarter of 2015?

2. Would you characterize the supply of rigs in your area as excessive, sufficient, or insufficient to meet first-quarter 2016 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 coil tubing units vs. workover rigs in the Midcontinent area?

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