Barnett, Fayetteville, Haynesville Operators Stretch Out Workover Payments

Synopsis

As workover activity drifts into somnolence in the Barnett, Fayetteville and Haynesville shales, everyone is preparing for a long nap while awaiting a recovery in natural gas prices.

In dry gas basins, operators are stretching out payments to contractors beyond 90 days and using workover rigs only as necessary. Meanwhile, smaller workover companies are shutting down.

Wellsite job mix, which is severely depressed vs. 18 months ago, is now 79% routine maintenance, up from 65% in the last regional survey. Hourly pricing for the benchmark 500 series C workover unit remains above $300, but is at or slightly below cash operating cost.

A regional consensus now exists among service lines on the price deck necessary to increase activity. For natural gas, the price is $2.90 to $3 sustained. For oil, it’s $51.

Until then, contractors are hunkering down while several operators are going dormant or redirecting capital spending elsewhere.

Few see recovery in 2016 and all are waiting for commodity prices to improve to a sustained level significantly higher than where they are currently.

Watch for the next Heard In The Field report on the dry gas basin workover market in September 2016.

Part I. – Survey Findings

Among Survey Participants:

• Demand Soft In Dry Gas Basin
  [See Question 1 on Statistical Review]
  ​All nine respondents said that demand has not weakened in the last three months, but it is a fraction of what it had been 18 months ago. Many of the operators have either reduced well service requirements to one third of what it had been previously, or have shut in wells altogether until the oil price improves.
  • Mid-Tier Well Service Manager: “We don't have a rig operating in Louisiana or East Texas today. We have zero activity and prices have collapsed. The reason is there is a lack of work; all of our customers are not doing anything. We had a little bit of completion activity in North Louisiana, but that ended.”

• Oil Prices Need To Climb To More Than $50
  [See Question 2 on Statistical Review]
  ​Respondents said oil prices need to range from $45 to $60 before workover demand picks up. In addition, the average of $51 needs to hold steady for demand to improve.
  • Mid-Tier Operator: “Ideally, we want a premium for oil and that would be at $80 per barrel price. But our economics will be different than anyone else’s and the truth is that $50 would be great.”

• Gas Prices Nearing $3 Considered Ideal
  [See Question 3 on Statistical Review]
  ​Five of the nine respondents said that gas prices between $2.50 and $3 would cause demand to pick up. The average gas price among all respondents was $2.97. One respondent said that anything higher than it is now would spur more work.
  • Large, Independent Operator: If gas could get to $2.50 that would be good. People don’t talk about gas because there is no money to be made. Everyone is moving away from gas.”

• Well Service Work Is Only What Is Necessary
  [See Question 4 on Statistical Review]
  ​Among all respondents, routine maintenance on average accounts for 79% of work, more than the 65% reported in September, as operators focus on only what is necessary in the dry gas basins. Completions account for 13%, plug and abandonment (P&A) work accounts for 1%, and workover accounts for 7% of all work performed.
  • Mid-Tier Operator: “We are completing what we drill. We have completed one horizontal.”

• Hourly Rates Vary
  [See Question 5 on Statistical Review]
  The hourly rate for the benchmark 500 series C workover unit is $300 per hour on average, slightly down from the $312 per hour reported in September. See Table I for average hourly rates.

• Hourly Rates Flat
  [See Question 6 on Statistical Review]
  ​Hourly rates for workover rigs are lower than a year ago and continue to decline quarter to quarter. However, all respondents said that rates could not go lower in the next three months because they have hit rock bottom.
  • Mid-Tier Well Service Manager: “For a 500 hp rig with the crew travel time and everything including a tool pusher cost $320 per hour.”

• Companies Operating At Diminished Capacity
  [See Question 7 on Statistical Review]
  Nearly all respondents said that most companies are operating at a fraction of where they were one year ago. No respondent singled out a company that was active in the market. One respondent said some small workover companies are operating with one rig only currently.

• Service Companies Are Leaving Dry Gas Basin
  [See Question 8 on Statistical Review]
  ​Two of the nine respondents said that some oil companies have left the dry gas basins. One respondent said some well service companies have left. Six respondents said that they were not aware of anyone leaving yet.
  • Mid-Tier Well Service Manager: “Service companies are leaving this area, not the big majors like Key, but more like small mom and pops.”

• Highly Leveraged Companies Struggling
  [See Question 9 on Statistical Review]
  Six respondents said that some small well service companies are closing their doors because they cannot withstand the downturn. Another three respondents said they were not aware of any company closing down.

• Payments Stretching To 120 Days
  [See Question 10 on Statistical Review]
  ​Two respondents said that payments were not being delayed as far as they know, while seven of the nine respondents said that payments are getting delayed beyond the 30 to 60 day window and were actually averaging 90 to 120 days.
  • Mid-Tier Well Service Manager: “Sure we are seeing delays in payment and we've verified every customer through our credit department now. I've got a watch service in which I get alerts every day. I have seen companies that were strong last year—ones that you never worried about a credit issue with—are now filing for bankruptcy.”

End Survey Findings

Survey Demographics

H A R T E N E R G Y researchers completed interviews with nine industry participants in the workover/well service segment in the dry gas basin. Participants included four oil and gas operators and five managers with well service companies. Interviews were conducted during late March 2016.

Part II. – Statistical Review

Workover/Well Services

[Dry Gas Basin]

[Oil and gas operators = 4, 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 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 and abandonment (P&A) vs. completion work?

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?

7. Which well service companies are the most active in your area during the downturn?

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

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

10. Are any companies delaying payments, if so, what are the terms?

End Statistical Survey