Hint Of Demand For Midcontinent Workover Rigs

Synopsis

Is a stagnant trend line actually a positive for those seeking signs that the industry has bottomed? If so, Midcontinent workover services are front and center as a benchmark.

Conditions, though bad, have not deteriorated further in the second quarter, according to Hart Energy’s Heard In The Field survey.

Indeed, some survey respondents are hearing customers say they might get active on the heels of improved commodity prices. Those comments are pre-Brexit, but worth noting.

Actually, demand for workover services was on the cusp of increasing until late spring when weather interrupted field work.

The magic ingredient for increasing oil services demand is no secret: commodity prices. And with operators emphasizing capital efficiency, efforts to move back into the field will be based partially on return on capital employed.

While several Midcontinent workover firms remain distressed, there has been little movement towards A&D. Potential acquirers just don’t want to add extra debt, especially when their own fleets remain underutilized, according to the survey.

Routine maintenance, largely on an “as needed only” basis, accounts for 90% of job mix in the Midcontinent. This is little changed from 90 days ago and similar to findings in other domestic markets.

Hourly rates for workover units also remain unchanged vs. averages for the first half of 2016. The benchmark 500 series C unit is going for $254 per hour on average.

It appears some workover firms are still working at below cash cost, which is non-sustainable long-term, the survey said.

Watch for the next Heard In The Field report on the Midcontinent workover/well service segment update in October.

Part I. – Survey Findings

Among Survey Participants:

• Hint Of Demand
  [See Question 1 on Statistical Review]
  ​All eight respondents said that demand for workover rigs has remained the same second-quarter 2016 vs. the first quarter. However, two respondents were optimistic that demand would pick up slightly based on conversations they were having with clients.
  • Mid-Tier Well Service Manager: “We started getting a few calls and it looked like it would pick up, but then the weather got bad and everything sort of stopped. I’m not sure when those calls will resume.”

• Oil, Gas Price Matters Most
  [See Question 2 on Statistical Review]
  ​Seven out of eight respondents said that the key catalyst to bumping up demand for well service in the Midcontinent would be the price of oil and gas. One top-tier operator said that return on investment was a factor equal to price for his company.
  • Mid-Tier Well Service Manager: “Oil prices get things moving around here. The slight pick-up in demand we just saw was based on [better] prices.”

• Mergers, Acquisitions Scarce In Midcontinent
  [See Question 3 and 4 on Statistical Review]
  Respondents were unanimous in their assessments that mergers and acquisitions were not in the competitive landscape in the workover markets at this time.
  • Mid-Tier Well Service Manager: “All the companies I speak with don’t want to take on any more debt so they are not in the buying frame of mind.”

• Majority Well Service Is Necessary Maintenance Only
  [See Question 5 on Statistical Review]
  ​Routine maintenance makes up the bulk of well service work in the Midcontinent area and accounts for 90% of all work performed, similar to findings in April. As drilling has slowed down, so have completions and other work associated with new wells.
  • Mid-Tier Well Service Manager: “We are doing some maintenance. Some of those wells we have we are not doing anything on and some we are doing maintenance for leaseholds.

• Few Completions, But All New
  [See Question 6 on Statistical Review]
  ​Three of the eight respondents said they had not completed a well in the last three months. Five of the eight respondents said they had completed wells and all of those were new wells.
  • Mid-Tier Well Service Manager: “We are not doing any completions right now, mainly we are doing rod and tubing jobs.”

• Hourly Rates Remain Low
  [See Question 7 on Statistical Review]
  ​The hourly rate for the popular size 500 horsepower (hp) series average $254 per hour, similar to findings in April and January with all respondents saying that well service rates are in a standstill. See Table I below for average hourly rates.
  • Mid-Tier Well Service Manager: “I see guys out working, but they are working at cheap price. We're not as cheap as they are but we market ourselves as a better worker. The cheaper ones are going to go out of business. Some have a lot of rigs sitting around and expect those companies would go under but haven't yet.”

• Hourly Rates Expected to Remain Flat Quarter-To-Quarter
  [See Question 8 on Statistical Review]
  ​All eight respondents said they do not expect costs to go down any further during the next three months. All operators and well service managers agreed that workover rig prices were as low as they could go in the Midcontinent area.
  • Mid-Tier Well Service Manager: “Price is all that matters because we cannot cut costs any lower than they are 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 the Midcontinent. Participants included four oil and gas operators and four managers with well service companies. Interviews were conducted during mid-June 2016.

Part II. – Statistical Review

Workover/Well Services

[Midcontinent]

Total Respondents = 8

[Operators = 4, Well service companies = 4]

1. Do you expect demand for workover rigs to grow, remain the same, or shrink in second-quarter 2016 compared to the first quarter?

2. Besides better oil and gas prices, are there any other catalysts that would help drilling improve?

3. Have there been any workover companies in your area that have merged together or have been acquired by another workover company?

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. Observing the percentage of completions, how much of the total percentage would be new completion work vs. remedial completion work?

6. What size (horsepower) workover rigs do you own? What is a representative rate for this size workover rig in your area?

7. Do you expect workover rig hourly rates to increase, remain the same or decrease over the next three months?

End Statistical Survey