Well Service Contractors Enter Price War As Demand Drops In Midcontinent

Synopsis

A pricing war has broken out among Midcontinent well service contractors, led by larger firms who are fighting for market share in a shrinking market. Average hourly rates for the benchmark 500 Series well service rig were up slightly this quarter to $344 versus the last report, but contractors are including items in the rate that were add ons previously. In all, well service contractors say hourly rates are down 27% versus peak compared to 20% in the January 2015 survey. Operators are only doing work that is absolutely necessary. In this survey, routine maintenance accounted for 86% of job mix on average versus 31% in January, a clear sign of how low commodity prices are impacting demand for well servicing units. Watch for the next Midcontinent report in July 2015.

Part I. – Survey Findings

Among Survey Participants:

• Rig Demand Down QTQ
  [See Question 1 on Statistical Review]
  ​All respondents said that rig demand continued to slow QTQ as oil prices then gas prices continued to weaken. Most of the well service companies are seeing more maintenance jobs than other standard workover service as drilling has slowed down.
  • Mid-Tier Well Service Manager: “We were in a downward spiral and it sent service companies into a downward price cycle and the dynamic caught everyone off guard and made them stand back because they didn't know how low it would go. Now folks are seeing what needs to happen and are asking—‘Should we shut down wells and change a pump on this one so we get better profit from it?’ The level of work here has been cut by 75%, but now people have hunkered down and are trying to figure out how to work in this environment.”

• Number of Rigs Excessive
  [See Question 2 on Statistical Review]
  ​All of the respondents said that there is now an excessive amount of rigs in the Midcontinent area, as operators are seeking ways to control cost and are only doing what work is necessary.
  • Mid-Tier Well Service Manager: “We actually had a contract with one company with two rigs and we were at 70 hours now we have dropped back to 50 hours. We had another contract that is now at 60 hours and had a contract that had originally had 12 rigs tied to it and went down to seven and now we have an eighth going back out there. Our tool company is operating at 50%. As price is increasing, we are picking up.”

• Well Service Companies Focusing on Maintenance
  [See Question 3 on Statistical Review]
  ​Among all respondents, maintenance on average accounts for 86% of work, which is a significant increase as operators focus on only what is necessary in the Midcontinent area. Completions account for 4%, plug and abandonment (P&A) work accounts for 0% and workover accounts for 10% of all work performed.
  • Mid-Tier Well Service Manager: “We are doing more maintenance while completions and workover work has slowed down.”

• Use of Coiled Tubing Not Growing
  [See Question 4 on Statistical Review]
  ​None of the respondents were using coiled tubing and did not expect use to grow in the area.
  • Mid-Tier Operator: “We haven’t used coiled tubing because we did not find it cost efficient.”

• Hourly Rates Vary Depending on Relationships
  [See Question 5 on Statistical Review]
  ​The hourly rate for the popular size 500 HP series is $344/hour on average, which reflects the discount contractors are giving in response to the lower oil prices. However, it also reflects a wide range starting at $260/hour up to $400/hour. See Table I for Average Hourly Rates.
  • Mid-Tier Well Service Manager: “There is a lot of throat cutting going on around here. Everyone has stacked rigs and laid-off folks.”

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

• Hourly Rates Down QTQ
  [See Question 6 on Statistical Review]
  ​Hourly rates for well service rigs are down 27% on average, with all respondents saying that continued low oil prices would create even more downward pressure on pricing throughout 2015.
  • Mid-Tier Well Service Manager: “The major well service companies are all fighting for market share and there is very limited market share right now so the fighting has caused rates to go down. A couple of these big well service companies are fighting it out and we are standing back and watching. We have kept our rates fairly steady and our utilization is better than some out here. Rates are an issue and we have seen some companies out there working below cost.”

• Competition Pressuring Rates
  [See Question 7 on Statistical Review]
  ​In the January report, respondents said that operators were asking for concessions in rates because of the lower oil prices. However, in this report, respondents said that competitors are going after the limited market share and this is having a downward effect on rates as well.
  • Mid-Tier Well Service Manager: “Some well service companies have lowered their rates 20% or more but some have lowered their prices so much that it has affected the quality of the people and equipment they are using and it has taken a downward toll. This will be short-lived. We were outbid by another service company, but in the end they took so much longer to do the job it cost the operator more than if we had won the bid.”

• Strategies Vary Among Companies
  [See Question 8 on Statistical Review]
  ​Most of the respondents said that they are focusing on maintenance work while operators slow workover and completion work in the area. One respondent said that they are trying to do the best work possible and keep their rigs updated as much as possible because most work is not about price but about ability.
  • Mid-Tier Well Service Manager: “The best thing I'm doing is partnering with oil companies in which I own half of a rig and they own the controlling interest in the other half. It's not for everybody because greed takes over. You have to not be greedy and the trust comes from a solid relationship not a contract.”

• Most Wells Are Completed
  [See Question 9 on Statistical Review]
  ​Three of the eight respondents said they are not hearing about wells being drilled and then not completed in the Midcontinent area. However, three respondents have heard operators were doing this. Two respondents said that all work has slowed down not just completions.
  • Top-Tier Operator: “I have no first hand evidence of drilling and not completing. I have read about it but haven't seen it. The horizontal wells we have participated in have been drilled and completed in a normal fashion.”

End Survey Findings

Survey Demographics

H A R T E N E R G Y researchers completed interviews with eight industry participants in the well service segment in the Midcontinent area. Participants included two oil and gas operators and six managers with well service companies. Interviews were conducted during April 2015.

Part II. – Statistical Review

Workover/Well Services

[Midcontinent]
Total Respondents = 8

[Oil & Gas Operators = 2, Well Service Companies = 6]

1. Do you expect demand for workover rigs to grow, remain the same, or shrink in 2Q2015 compared to 1Q2015?
Remain the Same: 1
Shrink: 7

2. Would you characterize the supply of rigs in your area as excessive, sufficient, or insufficient to meet the 1Q2015 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. How are coiled tubing (CT) units impacting your company's slate of work? Would you say CT units are getting more, less or the same amount of work that would have gone to work over rigs compared to six months ago?
Do not use coiled tubing 8

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? By what %?
Flat (0%) 1
Down 10% 1
Down 25% 3
Down 40% 2
Down 50% 1
AVERAGE Down 27%

7. Have you noticed competitors from other regions entering your area? What has been the effect on your fleet's utilization and hourly rates?
Yes, major players cutting significantly 2
Yes, some companies cut too much 1
No 5

8. What strategies are companies putting in place to cope with the low oil prices?
Focusing on maintenance work 5
Do the best work we can and maintain rigs 1
No strategy, things don’t look good 1

9. What are you seeing in terms of the number of wells being drilled but not completed?
We hear companies are not completing, but we are 3
Operators are only drilling what they need to 3
There is a general slowdown in drilling and completions 2

End Statistical Review