Well Service Activity Sees Modest Increase

Synopsis

The good news for Permian Basin well servicing contractors is hourly rates have stabilized and most of the decline in pricing is finished. The bad news is it will take higher commodity prices for operators to significantly ramp up workover activity. Nearly 80% of the job mix for well service operators involves routine maintenance. Hourly base pricing for the benchmark 500 series workover unit came in at $269 on average among survey participants. Operators are still heavily focused on cost so that even if 2015 demand picks up, hourly pricing is not likely to follow, pending an increase in commodity pricing. Watch for the next Permian Basin well servicing report in September 2015.

Part I. – Survey Findings

Among Survey Participants:

• Rig Demand Stable
  [See Question 1 on Statistical Review]
  ​All eight respondents said that demand for well service had stabilized in the last few weeks after generally declining quarter-to-quarter. Two of the eight were reluctant to call this a bottom to the decline they have seen in the Permian since January, but all agreed that it had not gotten worse in the last few weeks.
  • Mid-Tier Operator: “Is this a bounce or a bottom, or is it the dead cat bounce, I don’t know. But there are a lot of commercial wells out here that need to be drilled.”

• Number Of Rigs Excessive
  [See Question 2 on Statistical Review]
  ​All respondents said that there continues to be an excessive amount of rigs in the Permian Basin area, as operators are seeking ways to control cost and are only doing what work is necessary.
  • Mid-Tier Well Service Manager: “We are hoping it has stabilized but that doesn't signal that it is going to pick up. I think for the completion work to pick up we would have to see oil prices go up by $20 per barrel.”

• Well Service Companies Focusing On Maintenance
  [See Question 3 on Statistical Review]
  ​Among all respondents, maintenance on average accounts for 78% of work, which is a significant increase as operators focus on only what is necessary in the Permian Basin area. Completions account for 15%, plug and abandonment (P&A) work accounts for 3% and workover accounts for 4% of all work performed.
  • Mid-Tier Well Service Manager: “There is not much vertical well drilling going on, most of it is horizontal. That doesn't help a lot of people, only those who are in that business.”

• Workover Rigs Still In Majority
  [See Question 4 on Statistical Review]
  ​Six of the eight respondents said that they are using workover rigs vs. coiled tubing units to do well service work in the Permian Basin.
  • Mid-Tier Well Service Manager: “There is not a lot of coiled tubing in the Permian Basin. It is used more in Pennsylvania where they need a lot of coiled tubing and snubbing. It's a big deal because of higher pressure there.”

• Hourly Rates Are Relatively Stable
  [See Question 5 on Statistical Review]
  ​The hourly rate for the popular 500 horsepower (HP) series is $269 per hour on average, down from its peak of $300 per hour in 2014. See Table I for Average Hourly Rates.
  • Mid-Tier Well Service Manager: “We have seen a slight pick-up in demand, but not in prices.”

Table I. – Average Rates for Certain Workover Rig Sizes in the Permian Basin

• Hourly Rates Are Flat Quarter-To-Quarter
  [See Question 6 on Statistical Review]
  ​All respondents said that hourly rates, which had been falling since January, had remained flat quarter-to-quarter.
  • Mid-Tier Well Service Manager: “Prices are down nearly 50% in some areas from last year, but they have stabilized.”

• No Competition in the Market
  [See Question 7 on Statistical Review]
  ​Competition has been nonexistent as drilling is slowing down. All respondents said that they are not seeing new competition come into the Permian Basin.
  • Mid-Tier Well Service Manager: “We have seen companies going out of business.”

• Control Costs Is The Key Strategy
  [See Question 8 on Statistical Review]
  ​Controlling costs is the mantra for all of the companies in the Permian Basin area. Most respondents said that even if demand picks up they were not expecting hourly rates to go up significantly this year. One major operator said that the Permian Basin is an area of focus and they would be expanding there once capital freed up.
  • Top-Tier Operator: “Our position is we have big plans in the Permian Basin. Globally, we have a lot of capital projects that are coming to an end, but Permian is the next place for us and we have the opportunity here. Once the capital frees up this will be our focal point.”

• Most Wells Are Completed
  [See Question 9 on Statistical Review]
  All of the respondents said that wells they are working on are being completed. However, there are wells that have been drilled in the Permian Basin that need to be completed.
  • Mid-Tier Well Service Manager: “We are completing less wells but are completing those that have been drilled by the clients.”

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 area. Participants included four oil and gas operators and four managers with well service companies. Interviews were conducted during late June 2015.

Part II. – Statistical Review

Workover/Well Services

[Permian Basin]

Total Respondents = 8

[Oil & Gas Operators = 4, Well Service Companies = 4]

1. Do you expect demand for workover rigs to grow, remain the same, or shrink in third-quarter 2015 compared to second quarter?
Remain the Same 5
Shrink: 3

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?

4. Which type of well service equipment is gaining share in completions—coiled tubing (CT) units or workover rigs? What percentage of completion work is being done by coiled tubing units vs. workover rigs?
Workover rigs in use more than CT units 6
100% of work completed by workover rigs 6
100% of work completed by CT units 2

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?
Flat 0% 8
Average 0%

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?
Maintain cost 7
Expand as capital frees up 1

9. What are you seeing in terms of the number of wells being drilled but not completed?
Completing wells drilled 8

End Statistical Survey