Drilling advances
After a two-year drought, financially-parched drilling contractors and service companies can be excused for expecting a measure of payback, as more shale operators lay out plans to dust off their wallets this year. While the higher spend announced of late is unlikely to completely heal ravaged balance sheets, it at least would help recoup some of the rock-bottom discounts that have been extended, to keep some rigs drilling and mud flowing.
Schlumberger Chairman and CEO Paal Kibsgaard perhaps spoke for the entire service and supply community, when he told investors on Oct. 21, “Going forward, it is critical for us to recover the large pricing concessions we have made over the past two years, to allow us to restore investment levels in technology innovation, system integration, and operational quality and efficiency, which are all key enablers of our customer’s project performance.“”
For sure, any hints of a recovery are especially soothing music to drilling contractors, service providers and equipment manufacturers, who have borne the brunt of a lingering downturn that has induced wholesale evisceration of payrolls. Specifically, the beleaguered trio has accounted for more than three quarters of the 440,131 global oilfield jobs scuttled as of year-end 2016, Houston upstream advisory group, Graves & Co., told Bloomberg.
The latest proof of improving onshore fortunes came on Jan. 13, when the Federal Reserve Bank of Kansas City released the results of its 10th District Energy Survey, which includes Oklahoma, Wyoming, Colorado, Kansas and Nebraska. “Regional oil and gas firms said they returned to profitability in the fourth quarter, for the first time in over two years,” said Chad Wilkerson, vice president and Oklahoma City Branch executive. “Companies began hiring again and increased their drilling programs further.”
Reverse hedging. Recognizing that it probably will cost more to drill, frac and complete their unconventional wells going forward, independents are scrambling to nail down long-term contracts at today’s pricing structure. “On the drilling side, we have entered into long-term contracts at current market rates for several rigs through 2019, and on the completions side, we have contracted for approximately 5,000 completion stages per year through 2018,” Paul M. Rady, chairman and CEO of Antero Resources Corp, told analysts in the firm’s third-quarter earnings call.
The same for Gulfport Energy Corp., where Vice President of Drilling Rob Jones said that for now, “favorable rates” can still be had in select plays like the Marcellus-Utica shale. “We’ve been able to access very high-quality shale rigs from other basins, with very little mobility costs to Gulfport,” he said, adding the company has managed to “lock them in through the entirety of 2017 with favorable rates, even compared to 2016, which was at times surprising to me.”
Rice Energy, Inc., likewise, is working to secure 60% to 70% of its service costs long-term.“I think we’re having the same sentiment that most of our peers have, when it comes to service prices, and that we’re sort of at the bottom of where we think service prices can be,” says Senior Vice President of Midstream and Marketing Robert R. Wingo.
Range Resources COO Ray Walker, however, takes an antithetical perspective. “I think ’contracts’ is a term that gets way over-used when talking about service companies, because every contract’s different, and has different outs and different resets, and everything else that people put in there. We focus a lot on long-term relationships, not necessarily contracts.”
As for the tightening Permian market, Pioneer Natural Resources says its in-house pressure pumping operations provide a hedge against the primary cost component of an unconventional well. “We can argue all day long about when service companies are going to have pricing power. But the fact is, we’re doing our own completions. We have five fleets running today. We know what the costs of those are, so we’re not going to be subject to cost increases on completions, ” President and CEO Tim Dove told analysts on Nov. 2.
No thanks. Not every contractor, service company and equipment manufacturer is eager to jump on long-term contracts. “Service companies don’t really want to lock in today’s prices for any longer than they have to,” said Carrizo Oil & Gas President and CEO S.P. “Chip” Johnson in a Jan. 17 Wall Street Journal article.
Count premier land driller Patterson-UTI Energy, Inc., among those determined to avoid long-term commitments. “We think there’s upside in pricing in 2017, and we’re going to try to keep rigs on as short-term as possible,” CEO Andy Hendricks said on Oct. 27. “The contracts we recently signed for rigs have been six months, and so we’re just not getting pushed to longer-term contracts right now.”
Patterson, which in September acquired high-spec rig component builder Warrior Rig Ltd. of Calgary, says improving conditions can be found in dwindling early terminations, particularly in the West Texas Permian market, where at last count the driller had 22 rigs actively making hole. “If you follow our trend this year (2016), of early termination revenues per quarter, we were as high as $16 million, and now we’re down at $1.1 million in early terms. So I think next year (2017), we just don’t really see any early termination,” Hendricks said during the third-quarter earnings call.
Of course, the nascent, and tenuous, uptick could turn on its head, if operators go overboard with production. Factoring into that scenario is the estimated 5,379 drilled-but-uncompleted (DUC) wells that, as of December, were lying in wait in the seven largest U.S. shale basins, according to the U.S. Energy Information Administration (EIA). 
