Rocky Mountain Firms Considering Further Wage Cuts

Synopsis

Hope may spring eternal, but Rocky Mountain workover providers hope the malaise that accompanied the expiration of operator capital spending at the end of 2015 gives way to new expenditures in 2016.

Like their peers in the drilling industry, contractors are looking for revenue in additional service lines, such as plugging and abandonment, which offers steady work. Routine maintenance accounts for 59% of job mix.

Contractors report operators are avoiding work on federally owned lands (with its attendant paperwork) in favor of work on privately-held acreage.

Hourly rates for the benchmark 500 C series workover unit are difficult to peg because of low work volumes, but range from $240 to $260 an hour. Add-ons can boost those rates above $400 for workovers or completions.

However, the volume of workovers and completions remains low. Other than pursuing work in other service lines, workover contractors are running out of options for coping.

Wages have been reduced and may be reduced further. Some contractors prefer to shut down and wait out the market rather than reduce pricing any more.

A few contractors have their own production and are relying on that to tide them over until market conditions improve.

Watch for the next greater Rockies workover report in July 2016.

Part I. – Survey Findings

Among Survey Participants:

• Rig Demand Remains Lackluster
  [See Question 1 on Statistical Review]
  ​Five out of the eight respondents said demand is the same as it has been in the last three months, but three of eight said demand has weakened.
  • Mid-Tier Well Service Manager: “November and December have been pretty bad and slower than the middle of the year. A lot of that is budget money ran out. So we are waiting to see what gets renewed. Maybe it will pick up a little bit at the end of the first quarter.”

• Excessive Inventory
  [See Question 2 on Statistical Review]
  ​There is an excessive amount of rigs in the area, according to all respondents, and rigs continue to be stacked.
  • Mid-Tier Well Service Manager: “I expect a huge disaster this year. I look around at what's going on with our competitors and—fortunately—we actually have our rigs out there working. We diversified into doing other things with our rigs. So we are not just doing workovers, but P&A’s as well and that is steady.”

• Only Necessary Maintenance Being Done
  [See Question 3 on Statistical Review]
  ​Among all respondents, routine maintenance on average accounts for 59% of work, as operators focus on only what is only necessary to keep wells producing. Completions account for 20%, plug and abandonment (P&A) work accounts for 11% and workover accounts for 10% of all work performed.
  • Mid-Tier Well Service Manager: “2016 is already a disaster. We're doing a lot less completion work, but P&A is steady. There is very little work for the most part because the operators avoided the federal bureaucracy and have been drilling on private land. We occasionally do some work on federal leases strictly to hold the leases.”

• Mostly Workover Rigs Vs. Coiled Tubing Units
  [See Question 4 on Statistical Review]
  ​Two of the eight respondents use coiled tubing units some of the time, but mostly workover rigs and stick pipe are used on other wells. Workover rigs are used for 96% of the work compared to 4% for coiled tubing units.
  • Mid-Tier Operator: “We do very little coiled tubing, mostly stick pipe. Coiled tubing still can't get the depth we need. You could do it for free and it still would not be a good job if you can't get the depth.”

• Hourly Rates Vary Depending On Packages
  [See Question 5 on Statistical Review]
  ​The hourly rate for the key size 500 HP series is $230 per hour on average with all respondents saying that well service rates have lowered in the last three months. See Table I for Average Hourly Rates.
  • Mid-Tier Well Service Manager: “There is a lot of vague info about rates out there. The price on the 500 C rigs for a completion rig or production rig is in the $200 per hour range. If you take that same rig and work it on a completion and count in all the support equipment—then you are in the $400 to $500 range. In the Powder River region, the average range for a workover rig is $240 to $260 per hour.”

• Hourly Rates Flat
  [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. However, two well service managers said they anticipate that operators would begin asking for lower prices. One said that they could not drop prices lower and would have to shut down until things picked up rather than operate at a loss.
  • Mid-Tier Well Service Manager: “We are trying to cooperate and if they approach wanting more rate cuts, we will have to do something. We cut wages once last year. In 2014, we had 200 people and now we have 70 people, if even that right now. This first quarter will be tough.”

• 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 other Rockies area.”

• 2016 Outlook Grim
  [See Question 8 on Statistical Review]
  ​Four respondents do not know what their strategy will be to get through this year. Two will cut wages if rig rates fall again. One has long-term contracts in place and another has wells that are producing and are hoping to weather the year.
  • Mid-Tier Well Service Manager: “I'm hoping it will be better. Maybe 30% better, but it's really hard to tell. We are at the end of the fiscal year for oil companies and they have to rebudget. I'm hoping 2016 is better than 2015.”

• Completions And Drilling Lower Year-To-Year
  [See Question 9 on Statistical Review]
  ​Three respondents said wells in the other Rockies area are being drilled and not completed, while five said that the wells drilled have all been completed.
  • Mid-Tier Operator: “We are seeing more wells drilled and not completed on the eastern side of Wyoming in the private sector. They can't drill here and let them sit because they are federal leases. If they can pick up the frack for the price they want they'll complete, they’ll do it.”

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 other Rockies. Participants included two oil and gas operators and six managers with a well service company. Interviews were conducted during January 2016.

Part II. – Statistical Review

Workover/Well Services

[Other Rockies]

Total Respondents = 8

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

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 the first quarter of 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 coiled tubing units vs. workover rigs in the other Rockies?

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