Essential Maintenance Keeps Bakken Workover Firms Afloat

Synopsis

Bakken workover utilization has now fallen to the low-20 percentile level, prompting some companies to shut in operations while others are getting by job-to-job.

Operators are now announcing 2016 capital spending reductions that indicate significant cutbacks in store for 2016 and workover contractors are grappling with the implications. Like their counterparts on the land drilling side, at least three workover contractors in the current Hart Energy survey have shut in operations until conditions improve.

While few know when the market will improve, several suggest $45 oil sustained would be enough to encourage operators to begin maintenance activities in the oil patch with oil prices at $55 on average to seek completion activity improve.

Job mix among contractors reporting work sorted out to 84% routine maintenance, which was unchanged from the fourth-quarter 2015 Heard in the Field report.

Hourly rates continue falling. The rate for the benchmark 500 series C rig fell to $330 from $375 in the fourth quarter 2015. As is common in many markets, contractors insist rates cannot go lower although each new quarterly report finds pricing has dropped again.

Watch for the next Heard In The Field report on the Bakken workover market in May 2016.

Part I. – Survey Findings

Among Survey Participants:

• Activity Reduced But Steady Quarter-To-Quarter
  [See Question 1 on Statistical Review]
  ​Most respondents are operating at steady levels in the first quarter of 2016 compared with last quarter, though work levels are diminished. Four respondents expect activity levels to remain at the same low level next quarter. Three other respondents are expected to shut down until oil prices improve. Another said they are still deciding what to do this year.
  • Mid-Tier Well Service Manager: “We're still operating at about half capacity, but we are doing a lot better than most around here. Most well service companies are at about 20% to 25% of capacity and are just getting by.”

• Average $52 Oil Needed For Well Service Activity To Improve
  [See Question 2 on Statistical Review]
  ​Two respondents said $45 per barrel oil would trigger well service work, while the other five respondents said that oil prices would have to spike to $50 to $65 per barrel for demand to ramp.
  • Mid-Tier Well Service Manager: “Oil would have to be higher than $50 for things to get going around here because everybody has tightened their budgets. I don't think they will go back and look at budgets and change them unless prices were over $50. Gas prices don’t matter in the Bakken.”

• Natural Gas Prices Have Little Impact On Bakken
  [See Question 3 on Statistical Review]
  Six of the eight respondents said that gas prices would have little effect on work in the Bakken area. However, two said that an improvement would be seen in workover rig demand if the natural gas price would reach $4 to $4.50.
  • Mid-Tier Well Service Manager: “You need oil to get to $60 per barrel to pick up drilling, but $45 would raise demand for wells that are producing and require maintenance. Gas price does not matter here.”

• Essential Well Maintenance Keeps Companies Afloat
  [See Question 4 on Statistical Review]
  ​Among all respondents, routine maintenance on average accounts for 84% of work, similar to findings in November. Operators are focusing only on what is necessary to service wells in the Bakken Shale. Completions account for 12% and standard workovers account for 4% of all work performed. Among respondents, plug and abandonment (P&A) work is non-existent for the meantime.
  • Mid-Tier Well Service Manager: “We have no work right now on contract, but are trying to stay busy with work that we pick up on spot jobs.”

• Hourly Rates Vary
  [See Question 5 on Statistical Review]
  ​The hourly rate for the popular size 500 horsepower (hp) series is $330 per hour on average, down from $375 per hour in November. See Table I for average hourly rates.
  • Mid-Tier Well Service Manager: “We have two out of three rigs running right now and are still able to get $350 per hour.”

• Hourly Rates Expected To Be Flat
  [See Question 6 on Statistical Review]
  ​Over the next three months, all eight respondents said they do not expect hourly rates to go lower than where they are currently.
  • Mid-Tier Well Service Manager: “We are operating below 50% capacity with our rates down low. I don't think rates can go lower, but I also wouldn't be surprised if they did.”

• Maintenance Work Slow But Steady
  [See Question 7 on Statistical Review]
  Five of the eight respondents said that everyone is cutting back with no one is active. Three companies—Youngquist Brothers Inc., Mercer Well Services, and Precision Well Services—remain active in the area, though the pace of work is very slow across the board.

• Companies In Holding, Not Flight Pattern
  [See Question 8 on Statistical Review]
  ​Six of the eight respondents said that they have not seen any companies shutting their businesses and leaving the area. Those that have shut down are waiting to see what happens with oil prices, while those that remain open are busy at a diminished capacity.
  • Top-Tier Well Service Manager: “Everyone has been fairly resilient as far as contractors. We were working for Oxy, but they sold their assets and got out.”

• Well Service Contractors Hang On
  [See Question 9 on Statistical Review]
  ​All respondents said that most companies are hanging on even though it is rough in the Bakken right now and none mentioned any company that had gone out of business.
  • Mid-Tier Well Service Manager: “There are no major contractors leaving or going out of business, some mom and pops are struggling.”

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 Bakken Shale. Participants included three oil and gas operators and five managers with a well service company. Interviews were conducted during February 2016.

Part II. – Statistical Review

Workover/Well Services

[Bakken Shale]

Total Respondents = 8

[Oil and gas operators = 3, Well service companies = 5]

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. What would oil prices have to be for demand for drilling rigs to improve?

3. What would natural gas prices have to be for demand for drilling rigs to improve?

4. Looking at your slate of well service work, how much of it is workover vs. routine maintenance vs. plug & abandonment (P&A) vs. completion work?

5. What size (horsepower—hp) 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 percent?

7. Which workover companies remain active in your area during the downturn?

8. Are there any workover companies that have left your area?

9. Are there any workover companies that have gone out of business in your area?

End Statistical Survey