Coming on the heels of the last few articles about DUCs (drilled uncompleted wells) another discussion that is beginning to occur between analysts and companies is the shortage of equipment and manpower. Since pricing began to slide in 2014 over 350,000 people have lost their jobs across the United States and around the world from service companies, E&P’s, etc. While these cuts were necessary due to the cuts in CAPEX and D&C budgets. The question is what occurs if pricing and liquidity in the commodities market opens up allowing for E&P’s to begin drilling and completing wells again? According to the IEA’s outlook oil market is set to balance in second half of 2016 begging the question of whether this shortage will occur sooner rather than later.
By using DrillingInfo’s rig analytics and DUC monitor we overlayed strip pricing by month to see how the number of DUC’s compares to that of pricing. The question that remains is what pricing will it take to begin completing these DUCs; strip or hedged?
Through price swings up and down, the general trend is that as things pick up more field workers are hired and crews get back to work. There is some lag time as equipment needs to be fixed and prepared to get back to work and workers need to be retrained on equipment. This shortage creates a small price pop due to increased demand of services and a shortage of equipment and people that generally fixes itself over a relatively short time frame. A price rebound today might be different than those of past; the main reason DUCs. The number of DUCs around the country is topping 3,304 (as of 6/12/2016; taking into account a 6 month time lag in accurate reporting) across multiple basins and hundreds of operators as seen in the figure below. While there is enough HP in the market currently to serve the wells that are being completed what will occur when operators begin completing DUCs and drilling at the same time? The lag that was limited to new drills and limited DUCs that were mostly conventional wells will now be
under strain as these DUCs are first on the block to be completed followed by new drills. This will create an artificial lift in pricing not based on hydrocarbon volume but equipment shortage. Equipment and personnel will not be able to safely spin up as quickly as needed which will create an additional backlog of wells needing to be completed. This circular issue can create an extended period of time where pricing will be based off of shortage of equipment to get hydrocarbons to market compared to the world commodity market itself. This could create an incredible arbitrage for those trading commodities and those producing them, as well as service company costs not seen since oil last topped $100/bbl.
The ease at which new rigs can enter the market is dependent on the drilling companies that have stacked rigs, their locations, and if they have been stripped of parts to save money. An overview of stacked rigs vs active and marketed can be seen in the graphic and table below; which was pulled from DrillingInfo’s Rig Analytic.
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Table 1: Stacked Rigs DrillingInfo Rig Analytic
One can assume that the companies with the highest active rigs also have the highest stacked rigs as they as the largest drillers in the lower 48. If those top operators are stripping parts from their stacked rigs it should be fairly unnoticeable in terms of the total HP they have ready to deploy. The struggle for those companies will be maintaining their large fleet and active rigs; they will only have a certain amount ready to deploy at one time allowing others to fall into categories of needing repair. The smaller drilling companies will struggle more as stripping parts from their small pool of stacked rigs will not allow them to deploy extra rigs in a timely fashion. If they have good cash flow they should be able to maintain a certain amount of their fleet but will still be at a disadvantage to large drilling companies which have more capital and yard locations to move equipment around at cheaper costs.
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Table 2: Stacked Rigs Location by Basin DrillingInfo Rig Analytic
Continuing on looking at lower 48 stacked rights, the locations where these stacked rigs were last located before moving to their resting places can give an idea of where they might be located. Even though certain basins like the Appalachian basin have been hit hard by pricing and decreasing rigs, the percent of active rigs to those stacked in their respective regions are less than that of Texas. This can be skewed some as Texas is a large state with multiple plays that have been hit hard by the downturn but is an interesting view nonetheless. States with the highest stacked rigs for the lower 48 can be seen in the table below.
Table 3: Stacked rigs last known state DrillingInfo Rig Analytic
Looking at the HP of the rigs stacked we can get a general idea of the percent of horsepower stacked versus active in the country for the lower 48. Using DrillingInfo’s analytics platform we can do this by basin, state, drilling company, etc. to get an idea of how different regions compare to one another. Related: Zombie Stocks Brought Back To Life By Lithium Boom
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Table 4: Low with stacked rigs horsepower DrillingInfo Rig Analytic
While we cannot forecast how things will look in a year from now, recently we have seen pricing in both the futures and daily markets increasing. The additional help of LNG exports and new pipeline capacity being added to the north east should help some as well. If we as an industry do not look at what it will take to increase production and efficiency we will be fighting an uphill battle. This might not be all bad as a continuous increase in pricing will benefit the industry but this will be a new frontier for all, as shortages will take place on multiple fronts. Not having enough rigs and completion crews is one battle, not being able to complete wells that have been waiting 12+ months, along with crew shortages and new wells being simultaneously drilled will be an interesting situation. I for one am ready to go through this new frontier and hope we have learned mistakes of past.
By Phillip Dunning via Drillinginfo.com
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