Is it time to think about recovery in domestic oil field services?

The answer is yes—if the industry is looking for the initial green shoots, which historically have been defined by an increase in rig count. Large-scale recovery in oilfield services demand remains a 2016 event. There are various scenarios around the order of battle for how recovery progresses, typically based on how optimistic a commentator is about oil pricing. But a growing consensus suggests that the first signs of recovery should originate in the Permian Basin with the industry tackling the
rising supply of drilled but uncompleted wells.

Estimates on the number of uncompleted wells, sometimes called “fracklog,” exceed 4,000 units nationally. Half of those are in the Permian Basin. Reference to that backlog, and the growing role it is playing in industry conversations, has become a frequent topic in Hart Energy surveys of oilfield service firms.

Indeed, whether the service line is land drilling, well stimulation or workover services, sentiment has changed as service providers express confidence that the steep decline in demand for oil services has stabilized. The days of doom and gloom
are over. Furthermore, contractors across all service lines note pricing also has stabilized, though at very low rates.

Per-stage pricing for plug-and-perf operations in the Permian appears to be settling in the mid-to-high $50,000 range, down about 30% to 35% from the mid-to-high $80,000 range in fourth-quarter 2014.

Similarly, average spot pricing for 1,500-hp Tier I rigs in the Permian has edged below $20,000, plus or minus $2,500 depending on contractual arrangements. New work—and contractors are reporting that a small number of rigs have gone back to work on the basis of low rig rates—is done on a well-to-well basis. Outside the spot market, contracts cover the spectrum from subsidized contracts, contracts being paid off, re-negotiated contracts and well-to-well contracts. Overall, land contractors have seen rig pricing decline 20% to 25% since the first of the year.

In the Permian, operators moved to massive slickwater fracture stimulation largely as a cost-saving measure to cope with the downturn in commodity prices. In recent months, some operators have begun using resin-coated sand as a proppant to boost recoveries as part of a strategy of lowering the per-barrel cost of new oil. This nuanced shift from an emphasis on lowering well cost to a strategy on lowering the cost per barrel represents an important shift in philosophy, particularly if the industry is in for a long workout at a lower commodity price deck going forward.

Well stimulation firms tell Hart Energy that regional capacity, as measured by crew count, is roughly half the size it was at peak in 2014. Similarly, drilling rig utilization remains at 40% of prior peak, according to contractors participating in the Hart Energy survey program.

Although rising demand has yet to materialize in a significant way, several service providers express concern that a quick demand uptick will overwhelm the depleted crew count in the Permian Basin when it comes to well stimulation.

For workover services, the job mix has shifted to routine well maintenance as operators reduce expenditures by doing only what is necessary to sustain production. Well service contractors note that nearly 80% of the job mix centers on routine well maintenance, with completions accounting for 15%. Routine maintenance accounted for less than 45% of the job mix in early 2015.

Like their counterparts on the land drilling side, workover contractors have noticed an incremental demand uptick—enough to convince them of market stabilization but not enough to engender hope for better pricing. The industry will need higher oil prices for that.

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