Waiting On 2017: Contractors Hunker Down

Synopsis

The business plan for Eagle Ford workover contractors remains simple: hunker down and wait for a change in market direction in 2017.

Workover fleet utilization continues to edge lower. The available job mix remains weighted to routine maintenance, and hourly pricing continues to fall (now $358 on average for the benchmark 500 C series rig) even as contractors insist it can’t go any lower.

Contractors are finding it’s a knife fight for the few available jobs.

Completion work has dried up with the drop in drilling activity and workover contractors are highlighting plug and abandonment work as the only bright spot in new revenue.

Some fleets have shut down. Some contractors are seeking revenue outside the industry to get through tough times and all contractors are operating at minimal levels. In fact, some contractors describe the market as the worst they’ve ever seen.

There was no Eagle Ford in 1986, so statements of that nature are not out of line. Furthermore, nothing will change until oil prices recover and no one has a crystal ball clear enough to figure out when that will occur.

Watch for the next Eagle Ford workover report in March 2016.

Part I. – Survey Findings

Among Survey Participants:

• Rig Demand Remains Lackluster
  [See Question 1 on Statistical Review]
  ​Five of the eight respondents said that demand for well services and workover rigs had not gone lower, but was still relatively soft, while three said that they had seen demand weaken in the last three months.
  • Mid-Tier Operator: “We are keeping our production going but not drilling any new wells, so there is maintenance but nothing else.”

• Number Of Rigs Excessive
  [See Question 2 on Statistical Review]
  ​The number of rigs available for work in the Eagle Ford area exceeds the demand for rigs. Respondents said that this would continue into 2017.
  • Mid-Tier Operator: “We started 2015 with five rigs running and now have three running. We will start 2016 with three running but will only have two running later.”

• Well Service Companies Focusing On Maintenance
  [See Question 3 on Statistical Review]
  ​Among all respondents, routine maintenance on average accounts for 56% of work, similar to August findings, as operators focus on only what is necessary in the Eagle Ford area. Completions account for 7%, plug and abandonment (P&A) work accounts for 28% and workover accounts for 9% of all work performed.
  • Mid-Tier Well Service Manager: “The plugging side of the business will be busy because of railroad commission rules.”

• Workover Widely Used Vs. Coiled Tubing
  [See Question 4 on Statistical Review]
  ​Three of the eight respondents use coiled tubing units for a fraction of their well service business, but one said that coiled tubing revenues were way down from a year ago. Five respondents said that they were using workover rigs 100% of the time.
  • Mid-Tier Operator: “We use coiled tubing but not on a continuous basis. We’re about 10-25% coiled tubing, but it’s way, way down. We used it to frack horizontals but that business is way off. Coiled tubing is a small fraction of what it was.”

• Hourly Rates Vary Depending On Packages
  [See Question 5 on Statistical Review]
  ​The hourly rate for the popular size 500 HP series is $358 per hour on average, which represents the discounts that operators have demanded, and down from the average $425 per hour reported in August. See Table I for average hourly rates.
  • Mid-Tier Well Service Manager: “Rates for plugging business on a unit are $235 per hour. We started the year with 10 rigs and now we are down to one or two. We’re at 20% of what it was before.”

• Hourly Rates Flat
  [See Question 6 on Statistical Review]
  ​Hourly rates were softer than three months ago, however contractors said that rates could not go lower and remain profitable. Mostly, respondents are looking for niche areas to secure work.
  • Mid-Tier Operator: “The opportunities are very slim heading into 2016. Our company is going to have a fairly conservative budget. Prices will go lower in 2016, even though contractors told us they couldn't go down any more in early ‘15 and they have gone down.”

• 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 their prices as low as they could go.
  • Mid-Tier Operator: “Demand has gotten worse not better. It’s as bad as I have ever seen it.”

• The Key Strategy Is To Survive
  [See Question 8 on Statistical Review]
  ​Respondents had varying strategies as they are exiting 2015 and entering 2016. Four respondents believed a true recovery would not happen until 2017 as there is still a surplus that needs to be vetted. One respondent said they were positioning themselves now for a rebound whenever it happened. One company said it was shutting down in the Eagle Ford until further notice. One respondent had left a large company and was going into business for himself with one rig. One said there is no work right now and so he was working on personal projects until this downturn passed.
  • Mid-Tier Well Service Manager: “If prices stay like they are, the projections for next year are pretty grim. Nobody knows how to predict the end and nobody knows anything about what OPEC will do. There are those that think they can only go so long at the low prices and OPEC countries are hurting, but how much support from Saudi Arabia is the unknown.”

• Completions At Low Levels Following Low Drilling Activity
  [See Question 9 on Statistical Review]
  ​Seven of the eight respondents said that drilling activity has been minimal in the back half of 2015 so there has not been a lot of completion work. One said that they are completing every well they drill, however.
  • Mid-Tier Well Service Manager: “We haven’t seen a lot of wells drilled and so there has been very little in the way of completion work.”

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 Eagle Ford area. Participants included five oil and gas operators and three managers with well service companies. Interviews were conducted during late November 2015.

Part II. – Statistical Review

Workover/Well Services

[Eagle Ford Shale]

Total Respondents = 8

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

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

2. Would you characterize the supply of rigs in your area as excessive, sufficient, or insufficient to meet third-quarter 2015 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 and abandonment (P&A) vs. completion work?

4. What percentage of work is done by coiled tubing units vs workover rigs in the Eagle Ford 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