There’s still a lot of bad news in the land of Oilfield Services (OFS) giants recently. Schlumberger announced plans to lay off another 11,000 folks bringing their total to 20,000. Halliburton beat expectations on their quarterly revenue figures (due to activity in the Middle East, Asia, and Latin America), but continue to struggle with the unprecedented decline in drilling activity in North America. Halliburton’s merger dance partner Baker Hughes has upped its forecast to 10,500 job cuts, and also decided to drop its quarterly well count product.
OFS is in a squeeze right now – not only have they had to reduce their rates by ~30% to keep their customers liquid, they have also had an even more significant slowdown in activity that the simple story of the rig count doesn’t tell.
Decline in rig countBaker Hughes’ rig count has been a top line data point in most news stories around the current oil price decline. It does make for great headlines “40% decline in rig count,” and so forth. But if we dig deeper we see that most of the rigs that have been idled or released from activity are older rigs that are more focused on conventional vertical E&P.
Today’s newer rigs are much higher efficiency, quicker to the bottom of the hole, placed in multiwell pad situations (lessening downtime between wells), and focused on the highest grade rock available. The newer rigs are going to get a lot more holes in the ground a lot quicker than the ones being pulled out of service. Also the newer rigs are set up for horizontal wells, which, when they come on line, are going to produce hydrocarbons (at least initially) at a rate that far eclipses the older conventional wells.
For example, in the Permian Basin we show the following active rig decline over a 93 day period this year (For clarity I pulled a half dozen anomalous rigs out of the results that had been filed as “directional” or “unknown” trajectory).
Figure 1: Permian Basin 93 day Rig Count delta, Horizontal vs. Vertical
Over this period in the Permian Basin we dropped 128 horizontal rigs (42% of horizontal) and 72 vertical (59% of vertical) rigs. So the overall 46% decline is skewed by the lower output, less efficient vertical rigs. As another way of looking at this, in 2008 a steep decline in rig activity projected a fairly linear rate of decline in production. Now you have to take many more factors into account to have an accurate indicator of new production capacity. Which is part of the reason we have created the DI Index.
Drilled but not completed
A big part of the business for all three of the OFS giants are well completion services, and the most expensive of those completions services revolve around the more complex hydraulic fracture jobs. After you have drilled a well, you have to case, perforate, and stimulate the target zone. These are complex operations, and even with the recently negotiated ~30% cost reduction in OFS, are still likely to bill millions of dollars per well.
Lately we’re in a situation where not only have drilling activities slowed, but there is lots of chatter about wells that have been drilled but are as yet unfracked. Recently, Harold “Cowboyistan” Hamm claimed as many as 85% of wells aren’t being completed, and on their earnings call yesterday Halliburton estimated that around 4000 wells are currently in a drilled but uncompleted state.
A few weeks back, our CEO Allen Gilmer spent a few hours crafting a US Production Report using our DI tools (and predicted peak US production days before the EIA) and as part of that calculation allowed for drilled but not completed as 25% of drilled wells.
What’s next for OFS?
With today’s WTI continuing to sustain around $56, we might see operators reaching to turn on the spigots of these as yet unfracked wells. This will be good news for Halliburton, Schlumberger and their peers, since their crews will be called upon to frack those wells.
Within our DI Rigs Analytics package you can look at active rigs by a a variety of measures. The following chart shows horizontal rig activity in the Permian Basin targeting any of the Bone Spring formations colored by whichever of the 21 drillers are actively drilling there for the past three months. (I chose Bone Springs because of Matt Menchaca’s excellent geology and production write-up on the formation).
Figure 3: Horizontal Wells targeting Bone Springs formations colored by Driller
A first glance reveals that’s a lot of activity, and the slow-down is affecting most of the drillers – some of them down to a trickle. But the operators that have hired those drillers are waiting for a price point, maybe $60, maybe $65, at which they feel good about turning on the unfracked 25-85%. That represents an awful lot of ~750-1000 MaxIP faucets waiting to be turned on, and you can bet Halliburton and Shlumberger’s fortunes will turn around in a hurry when that price inflection point is hit.
And, if the price recovery holds out (which has to do it seems with not immediately re-flooding the market), with today’s technology we might be in position to create a period of sustained growth instead of just another boom.
What do you think? Leave a comment below.
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