Recent Trends In The U.S. Land Drilling Market: Re-fracking, Growing Well Inventory, Lower Rig Counts

The tight oil boom in the United States has been largely responsible for the present turmoil in the global oil markets. Average annual production growth in the U.S. has stood at about 1 million barrels per day over the last four years, taking production to current levels of over 9 million barrels a day. WTI crude, the U.S. benchmark, is currently trading at levels of about $47 per barrel, down by about 50% since mid-June 2014. The tight oil industry has been affected by the glut as well, owing to the high marginal cost of production (average break-even upwards of $60 per barrel, although this can vary by basin), which is making a large portion of U.S. production unviable at current prices. While unconventional sources account for just above 40% of total U.S. oil production, their impact on overall upstream activity and the broader oilfield services market is more profound due to significantly higher service intensities. Exploration and production related spending in North America could see cuts upwards of 30% this year, as operators face mounting pressure on cash flows. So what exactly are exploration and production firms doing on the oilfield to better cope with current situation, and how will this reflect on the oilfield services companies that we cover?

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Rig Count Declines, Market For Drilling Services Could Shrink

Oil-directed drilling activity in the U.S. has seen an abrupt decline this year as oil companies executed against their smaller upstream capex budgets. The oil rig count stood at 825 units at the end of last week, down by over 44% since the beginning of this year and around 49% from its mid-October 2014 highs. The horizontal rig count, which is an indicator of unconventional drilling activity, is down by about 38% year to date. ^[1] The trends in the rig count have varied across the major shale basins in the United States. While the rig count in the Williston basin (where the Bakken shale is located) and the Permian basin are each down by about 45% year-to-date, respectively, the decline in the Eagle Ford shale has been more moderate at 34%, possibly owing to the region’s lower production costs and better takeaway capacity.

The decline in the rig count has multiple implications for the industry. Both the U.S. EIA and IEA expect a monthly sequential cut in oil production in the U.S. around mid-year, as there is typically a lag. ((Kibsgaard Speaks at Scotia Howard Weil 2015 Energy Conference, Schlumberger, March 2015)) Although the decline in the rig count has been abrupt, we believe that it will not translate into a similarly sharp drop in North American revenues for the oilfield services companies that we cover. While demand for reservoir characterization and drilling related services could decline meaningfully, the uptake  for production-focused services is likely to hold up much better, although prices will certainly take a hit (pricing cuts upwards of 20% are possible).

Well Productivity, Re-fracking in Focus

Well productivity is likely to receive a lot more attention in the current environment, as operators look to maximize investments on their already drilled wells as cash flows from production trend lower.  Drillers have more than doubled the lateral sections of the wells over the last 5 years, enabling them to reach a larger producing area from a single surface drilling location, while also boosting the number of stages of the well that they frack. The volume of water and proppant used per stage has also been trending upwards. For instance, Halliburton reported that fracking sand volumes increased by 46% year-over-year on a per-well basis during Q4. Re-fracking is another trend that has been gaining momentum over the last few months. Re-fracking refers to the practice of returning to older shale wells that have already been fracked and deploying newer or more effective extraction technology on the wells. While it can cost about $8 million to drill, complete and stimulate a new tight oil well, re-fracking an existing well can cost just about $2 million. ((Drillers Take Second Crack at Fracking Old Wells to Cut Cost, Bloomberg, February 2015)) While the results of re-fracking have been decidedly mixed in the past, many operators seem to be willing to take the risk, as they look to continue production without increasing costs and investing in new wells. According to Bloomberg, there are over 50,000 existing wells in the U.S. that could be candidates for a second wave of fracking. This could be a growing market for oilfield services companies.

Rising Backlog of Uncompleted Wells

The backlog of drilled but uncompleted wells in the United States has been rising of late. Well completions – which include tubing, cementing, stimulation and related services – account for roughly 70% of the total cost of shale wells, and operators are exercising greater discipline in completing and bringing wells online in the current pricing environment.  Some analysts put the number of uncompleted wells at over 1,400. ^[2] For perspective, about 9,500 wells (oil and gas) were drilled in the United States during Q4 2014. ^[3] Several oil and gas companies have outlined their intention to deliberately build an inventory of uncompleted wells that can be brought online as oil prices rise. For example, EOG Resources (NYSE:EOG) sees a backlog of about 350 wells this year and Anadarko Corp. (NYSE:APC) sees a backlog of 125 wells. ^[4] The inventory of uncompleted wells could have multiple implications for oilfield services companies. For one, the market for drilling services will face more challenges as companies build up an inventory of drilled wells, reducing the need for new wells. Additionally, the trend could delay the completions and stimulation cycle for oilfield services companies.

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1. Baker Hughes Rig Count [↩]
2. Oil rig count continues slide as debate grows on uncompleted well backlog, Platts, March 2015 [↩]
3. Baker Hughes Well Count [↩]
4. ref:4 [↩]