US drilling and completion companies that were slashing workforces and cannibalizing pumping trucks for parts 6 months ago are now hiring crews and repairing equipment to meet rising demand.
“Utilization of crews is already effectively at 100% and that is driving our prices up,” said Richard Spears, managing partner for Spears & Associates, during a recent presentation put on by the SPE Gulf Coast Section and the American Association of Drilling Engineers. The firm that tracks oilfield services is expecting that prices for pressure pumping will rise 10 to 20% when multiwell service contracts come up for renewal early in 2017.
The sector, which was the first to feel the pain of the downturn, began to recover late last year and then got a boost from OPEC, which agreed to cut production to push up oil prices.
“Generally, across the Lower 48 even before the OPEC decision, there was a sense that 2017 would be a better year for oilfield service companies,” said Jackson Sandeen, senior research analyst for Wood Mackenzie. The oilfield information firm predicts a 10% inflation rate in the US drilling and completion service sector.
He and other analysts see increases in the cost of pressure pumping, sand, and wireline services early in the year, and rising drilling rates later on.
IHS is predicting a 25% rise in the cost of services and supplies for fracturing in 2017, said Samir Nangia, director of consulting in the IHS Energy Insight Group. That estimate is up from the firm’s prediction made 3 months ago. Nangia said that oilfield “hiring has picked up. And we are hearing it has picked up pretty significantly.”
The comeback they are describing is still an anomaly within the global industry. Offshore exploration and oil sands development will remain in a deep slump, while onshore drilling in most countries will grow sluggishly, if at all.
Even large parts of the US unconventional business are little affected by the upturn that pushed the number of rigs working in the US from 404 rigs at the bottom of May 2016 to 658 at year’s end, according to the Baker Hughes rig count. This could simply be described as the Permian Basin rally, which is where more than half of the US drilling rigs are working—five times the second-most active play, the Eagle Ford.
Demand for completion services outstripped the growth in drilling rigs working because much longer horizontal wells are being drilled faster and fractured using far more water and sand per foot to create more productive fracture networks and prop them open.
Demand began pushing up sand prices first in 2016, and in 2017 the cost of proppant is expected to rise by 15%, Sandeen said. This is expected to lead to short supplies in the lowest-priced sand—brown sand, which has been used to limit the added cost of high-volume jobs—forcing users to buy higher-cost grades, he said.
Tough Business
Richard Spears sees growing backlogs for pressure pumping equipment leading to a struggle between operators and suppliers over who controls purchasing.
During the depths of the downturn, he said operators insisted on deals where they no longer had to buy sand and chemicals from service companies, which had long benefitted from markups on sales of supplies. As it gets harder to line up completion services, he predicts the providers will use that leverage to try to regain control.
Such battles show this is still a tough business, but these are better problems to have than fighting for survival after oil prices plunged last spring, and things hit bottom around mid-2016.
Last July, oil and gas companies announced more than 40,000 job cuts, which helped push global industry losses to more than 420,000 since the downturn began in 2014, according to John Graves, president of Graves & Co. He has been doing fewer updates as the pace of layoffs has slowed, though he is still seeing cuts in some slumping sectors, such as shipyards supplying the offshore business. He can see things are picking up around Texas based on his company’s work reviewing deals for clients, but hiring is hard to track because companies generally do not announce plans to add workers.
The fact that the service business is improving in the US also reflects how much capacity has been lost in a sector hit early and hard by the downturn. The industry laid off more than 60% of the nontechnical labor force, Nangia said.
The current capacity of pumper trucks used for fracturing is 7 million horsepower, about one-third of the late 2014 peak, Richard Spears said. The upside is the industry should be able to push it to 12 to 14 million horsepower at a reasonable cost, he said.
That added supply, though, will limit the pace of price increases, as could oil prices if they do not rise as hoped.
“For now, surplus capacity is weighing on the market. The supply-demand balance is heading in the right direction. We are still in an oversupplied market,” said Jeffrey Miller, president of Halliburton, during the company’s third-quarter 2016 earnings call, adding that “this equipment has required substantial maintenance, so price increases are needed.”
Many of their customers argue they cannot afford rising costs. Oil prices in the low USD 50/bbl are just reaching the level where the majority of companies in the unconventional business can profitably drill and complete those wells, and they are reluctant to assume that oil prices will rise to cover a big jump in expenses.
At a client briefing shortly after OPEC, John Spears, president of Spears & Associates, predicted the deal will reduce supplies by 1.5 million B/D by the second quarter of this year, aiding prices. But the payoff for the OPEC cuts will be capped by production added as higher prices bring more barrels on to the market out of storage or from places not covered by production limits.
“It’s not going back to USD 90[/bbl] to USD 100[/bbl], but we do see prices going up from where they are,” said John Spears, who forecasts oil prices of USD 55/bbl to USD 60/bbl by late 2017, and going up from there to a peak level of around USD 70/bbl.
Rising demand presents a new set of problems for service providers, particularly smaller ones. While the biggest companies can begin focusing on profits, offering opportunities to smaller players, they need to raise some money to do so.
Good experienced hands are hard to find because many of those who were laid off found other jobs and are not coming back and the qualified locals in West Texas who want to work are already working, Richard Spears said.
An alternative is hiring newcomers who are willing and able to get to wellsites in remote spots in West Texas and New Mexico. It can take a year of training and on-the-job experience to reach the level of being a trusted hand, IHS said in its PumpingIQ report. Another alternative is to persuade those who lost their jobs to return to a business where sudden layoffs are an occupational hazard. That could be costly because they “may be reluctant to return unless they get good salaries,” Duesund said.
In the Bakken, some companies are offering sign-on bonuses for truck drivers and housing assistance to attract talent that is scarce locally, according to a story in The Bismarck Tribune newspaper.
Another cost of growth will be fixing pumping equipment. Even modest repairs can be a financial stretch for cash-short companies that have kept crews working by taking on jobs that often resulted in a loss.
A year from now, the price of pressure pumping is likely to spike as the industry uses up the inventory of serviceable used trucks. After that, the cost of fixing up the remaining pumping trucks is around the cost of buying new equipment, Richard Spears said.
Opportunities will be there as the strongest names—Schlumberger and Halliburton—focus on increasing profit margins, even if it means losing market share.
“Oilfield service companies are going to have to recapture margins to stay in business,” Sandeen said.
But smaller players will not have a lot of time to figure out how to finance growth. Based on past recoveries, the comeback in drilling and completions will happen rapidly, rewarding those with the cash to grow.
For those without credit, “the orders are there but service companies have no ability to buy the product they need to deliver,” said Richard Spears.
Service companies are seeking long-term contracts at the higher rates needed to pay to add capacity, but operators are pushing back. “We do not see anyone willing to sign contracts,” Nangia said, adding service companies are offering lower rates for deals running 6 months or more.
The prospect of rebuilding the business can be an attractive trap for cash-strapped service companies. Banks loans are not an option for those companies. The investors interested in the sector are selective, and if they are willing to put up money ask for a lot in return.
“It [growth] is a real challenge for companies because that requires a substantial amount of working capital to fix those trucks up and hire crews for jobs that they will not be paid for from 60 to 90 days,” after it is done, said John Spears. As a result, industry upturns often lead to more bankruptcies.
