Dry Gas Basins: Contractors Scramble To Retain Crews, Find Work

Synopsis

Demand for workover services in the traditional dry gas basins is slowing once again.

Equipment continues to stack out for lack of demand. Meanwhile, expectations are that demand will drift lower yet among workover contractors participating in the Hart Energy survey.

The mix of jobs in the Fayetteville, Barnett and Haynesville reflects trends in other parts of the country and sort out to about 60% routine maintenance and 20% completions.

Hourly rates are down 25% for the benchmark 500 series rig since the last dry gas basin survey in April 2015 to just more than $300 per hour. At the same time, workover rigs continue to stack out. Those rigs that keep working are employed on minor jobs or routine maintenance.

A couple contractors, who have been through several downturns dating back 40 years, say this one is the worst they have seen.

Watch for the next traditional dry gas basin report on workover activity in the Fayetteville, Barnett and Haynesville shale plays in April 2016.

Part I. – Survey Findings

Among Survey Participants:

• Rig Demand Weakens
  [See Question 1 on Statistical Review]
  ​Five respondents said demand for workover rigs in the dry gas basin area remained slow, but steady over the last three months. Meanwhile, three said demand had weakened.
  • Mid-Tier Well Service Manager: “It is much worse in the last couple of months. The customer I was talking to today was running three to four rigs a day and now he’s down to one and our other major anchor customers—same thing. They have backed off all work except for emergencies.”

• Number Of Rigs Excessive
  [See Question 2 on Statistical Review]
  ​The number of rigs available for work in the dry gas basin area exceeds the demand for rigs. Respondents said that this would continue throughout 2015 and possibly into 2016.
  • Top-Tier Well Service Manager: “We have stacked a number of rigs and it doesn't look like we have enough work to reopen. I think we have 18 rigs stacked and another major has 12 stacked. There is some drilling, but in this area it is very slow and the only drilling we are seeing is out towards west.”

• Well Service Companies Focusing On Maintenance
  [See Question 3 on Statistical Review]
  ​Among all respondents, routine maintenance on average accounts for 65% of work as operators focus on only what is necessary in the dry gas basin area. This is the same as in the April report. Completions account for 19%, plug and abandonment (P&A) work accounts for 6% and workover accounts for 10% of all work performed.
  • Mid-Tier Well Service Manager: “We activated our P&A line again. We basically had it on the periphery for the last seven years, but—with it slowing down and trying to find work for the men—we decided to activate it and are just now issuing bids during the last 45 days. We are starting to see a little bit of feedback. It’s marginal low-end work. But, our maintenance work is only fixing the really good wells because no one is going out and drilling and there is zero workover activity right now. We moved a rig out this morning and going to start one completion tomorrow. Literally that is one completion job only.”

• Workover Widely Used Vs. Coiled Tubing
  [See Question 4 on Statistical Review]
  ​None of the eight respondents are using coiled tubing units. All said they used workover rigs to do well service jobs in the dry gas basin. However, one respondent said they were looking into using coiled tubing now that rates had dropped significantly year-to-year.
  • Mid-Tier Well Service Manager: “We are looking at using coiled tubing units for work we have never considered using it on before because the prices have dropped so low. But we haven't used it yet.”

• Hourly Rates Vary Depending On Relationships
  [See Question 5 on Statistical Review]
  ​The hourly rate for the popular size 500 HP series is $312/hour on average, which represents the year-to-year discounts that operators have demanded and is down from an average $408/hour in April. See Table II below for average hourly rates.
  • Mid-Tier Well Service Manager: “We are at the point where we are break-even on rates. I had to bump a long-time supervisor with our company and offer him an hourly position to maintain our costs. We are right at the point where it is affecting the structure of this business. Safety drives everything and it is pretty costly. I don't see how we could go much lower. Guys won’t go out and work on rigs for essentially minimum wage and we are literally over twice minimum wage on entry-level positions.”

• Hourly Rates Flat
  [See Question 6 on Statistical Review]
  ​Demand was weaker in third-quarter 2015 vs. the second quarter according to three of the eight respondents, but rates have remained flat quarter-to-quarter as most respondents said that rates cannot go any lower.
  • Top-Tier Operator: “I've wondered if rates could go lower than they have because it seems as if everyone is operating at cost.”

• Little Competition In A Weak Industry
  [See Question 7 on Statistical Review]
  ​There is no new competition in the area as most contractors who are working have been in a relationship with the operator before the downturn. Respondents said that there is so very little work that they believe some companies will go under rather than compete at below-margin rates.
  • Mid-Tier Well Service Manager: “There is no competition. We had a guy [who] wanted to start drawing partial unemployment because we can't give him any hours. We have one out of four rigs running but one caught a one-day job this week. All we are doing is maintenance.”

• Strategy Is To Hold Steady
  [See Question 8 on Statistical Review]
  ​Respondents were unanimous in saying that there is little they can do except control costs and try to retain valuable employees. Three respondents said they would continue to look for work and finish current jobs, two said they are focusing on tightening their belts, and two said they are just trying to hang tight, control costs and ride out this downturn. One operator said they are not drilling right now in response to the lower oil prices.
  • Mid-Tier Well Service Manager: “For us, we have had some customers stay with us. For our sales, we do have customers keeping us busy. A guy called a few minutes ago and gave us two jobs for next week. Some of the competitors around here have shut down and we haven't shut down any rigs, so we are staying above water. If some stuff pans out we will be doing pretty well. Some are catching up on stuff that had been put off. For instance, a man bought a well and decided he wanted to set it up. Overall though for the last year, this is the worst I've seen it.”

• Wells Are Completed
  [See Question 9 on Statistical Review]
  ​All respondents are completing whatever wells are being drilled, but drilling has slowed down considerably in the dry gas basin areas as a response to lower commodity prices and uncertainty in the market.
  • Top-Tier Well Service Manager: “Demand was steady but now we have taken another tick down. We're taking any work that comes our way right now.”

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 dry gas basins within the Ark-La-Tex region, including the Barnett, Haynesville, and Fayetteville shale areas. Participants included three oil and gas operators and five managers with well service companies. Interviews were conducted during early April 2015.

Part II. – Statistical Review

Workover/Well Service Sector

[Dry Gas Basins]

Total Respondents = 8

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

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

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

4. What percentage of work is done by coiled tubing units vs. workover rigs in the dry gas basin?

5. What size workover rigs do you own? What is an average hourly 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. Have you noticed competitors from other regions entering your area?

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