That screeching sound in the background is the brakes being slammed on drilling, at least for the short term. Rental companies feel the heat, whether they’re renting downhole tools, like Lucky Services’ Vice President of Operations Terry Goodwin, or surface machinery, like Gravity Vice President of Rental Solutions Chad Wolf.
Both rely more on rentals for production than on rentals for drilling and completion activity—in this environment, anyway.
Wolf, based in Oklahoma City, sees pipeline constraints among the biggest factors in the year-end slowdown. “The pipeline constraints are limiting the number of wells that are being drilled and, in turn, now that there’s such a volume of DUCs [drilled but uncompleted wells] we’re seeing a slowdown in drilling activity,” Wolf said, adding that the volume of DUCs is such that completion crews will be working a long time to catch up even after new pipelines come on line.
“What that means for us is that the market is somewhat shrinking—there’s not as much volume of business out there as there was.” Wolf believes that the additional pipeline capacity coming online in the next few months is already sold, for the most part, so it will have less effect on pricing and therefore on drilling than may be expected—at least in the short term.
Gravity’s rental mix is currently split about 50-50 between drilling and completions/production, reflecting a small decrease on the drilling side. Wolf said Gravity’s exposure to completions is limited to frac tanks and light towers. “On the production side we have natural gas generators—that’s what is primarily in play there.”
The pushback on natural gas from choked pipelines has inflated both flaring and capture for power generation, and Gravity has consequently grown its gas-powered generator business. “We’ve invested heavily in natural gas generators over the past years, and we continue to invest in those generators.” Also, “We have a diesel fleet that is still an important piece of our business.”
Recent changes in diesel fuel rules to enhance clean air standards have also been part of the push toward gas generators on site. Wolf reports that, as of January 2018, all new off-road diesel engines of the size needed for oil and gas sites had to comply with Tier 4 emissions standards, just like on-road vehicles. This means reduced efficiencies. So before the rules took effect, Gravity stocked up on the pre-compliance engines, which they still make available to customers.
When asked about the future of electric frac’ing, Wolf said the number of kilowatt hours required for a frac job approximates the number required to power about 1,500 homes, and that Gravity is not currently looking to supplying that level of power. He added that electric frac’ing is economical mainly when using “free” gas that would otherwise be flared. If gas were selling at 2009 prices, the procedure would likely be cost-prohibitive.
With a smaller pie of business and still a large number of vendors vying for the remaining pieces, the inevitable downward price pressure is in evidence. That is on top of the fact that, said Wolf, even during more active times earlier this year service companies had only been able to return to about 75 percent of what they could charge in the boom times of 2014.
“They cycle that we tend to be in right now is that, once we do experience a downturn, pricing gets pushed down—and it goes down much faster than it comes back up.”
While higher prices—$70-$80—would be a “starting point,” for better fee structures for producers, the other key would be “maintaining some consistency there for, probably, 18-24 months, is what it would really take for the service companies to get back to some of the rates that we would see back in the 2014 era,” Wolf said.
“Consistency,” he noted, “is something that we’re lacking.” Anybody who has been in the oil patch for more than a couple of weeks will “Amen” that.
With Gravity active in basins across the United States, Wolf observed that the Permian is still number one in volume of business, but it is also more volatile than most other areas. “One of the things we’re seeing in some of the other areas, specifically the Haynesville, the DJ (Basin), and North Dakota, and even in Pennsylvania/Ohio, is that those areas are more consistent. The rig count fluctuates less, the operators tend to stay the course—there’s not a big ramp-up and ramp-down phase, like we have there in the Permian. I’m not 100 percent sure what causes that, if it’s that takeaway capacity and well decline in those areas is more predictable,” if drilling and forecasting are more reliable there or if it’s something else, he said.
Lucky’s Hobbs, N.M.-based Goodwin feels that change and the rate of change in the oil field are increasing—and that it’s a race to stay ahead of the curve, as Gravity did by adjusting the types of generators they buy. Noting that the company is considering how to expand in 2020, Goodwin said some options come from customer requests and that other come “just from being out there, seeing what’s [happening]. The oilfield has changed so much, even in the last five years, you’ve gotta try and keep up with it or it’ll just walk off and leave you. You can’t operate like you were 15 years ago.”
The proliferation of horizontal drilling with miles-long laterals and multistage frac’ing are part of the change he sees. For Lucky, those procedures have led a migration to Venturi tools used for cleaning out those long laterals in the production phase. “We’ve kind of gotten into that in the last year,” he said, noting that they have a variety of sizes that stay rented out most of the time. Frac sand carried back into the lateral, particularly in Wolfcamp wells, can block circulation. “These tools are designed to clean out a well that doesn’t circulate,” Goodwin said.
Focusing on the production side, with the Venturi and other tools, has kept Lucky’s rental business humming even during a general slowdown. “We have stayed busy right through,” he said. Busy, yes, but with an occasional slow week here and there.
“I’ve got 13 field hands right now and we’re keeping them working pretty much every day,” he continued. A wide customer base helps even things out as well.
For 2020, the company is considering several possible new ideas. “We’re looking at possibly some through-tubing tools, and looking at [some other] things. No definite plans, but we are looking at some options to expand our side of it a little bit from where we’re at.” As a company, Lucky Services provides pulling units as well as health/safety work from locations in Hobbs, N.M., and on FM 1788 between Odessa and Midland.
Medium to small producers comprise a good percentage of their business, Goodwin said, adding, “We do the majority of our work with the bigger independents.”
The 2018 Q4 was good for the company and Goodwin expects the same in 2019. Although some companies have spent all their capex budget by Q4, others suddenly have to race to spend what’s left, under the “use it or lose it” reality of budget planning. The production side also sees immediate and overriding benefits to service expenditures. “We have these producers producing, and we have to keep them producing for them to get their revenue.”
For Goodwin, there are some good things about being based in Hobbs, even though the company serves customers as far away as Ft. Stockton and Big Spring. The blessing has to do with comparative levels of competition.
“There’s lots of competition in the Permian Basin—but that’s one thing about the New Mexico area over here, it’s not nearly as bad as the Midland/Odessa area as far as competition in what we do,” he observed.
“On my side, I try to strive for excellent service [instead of] price. I don’t make any deals with anybody special. I have fair pricing plus,” he said. “That’s what keeps our customers coming back.”
In fishing, there is indeed a sense of urgency. “The people out there in the oil companies, when you’re fishing, you go out there and do them a good job all the time, they don’t really care what it’s costing them, they want their well cleaned up—they want their problem fixed. And that’s what we strive for.”
Though price stability would be in everyone’s Christmas stocking if their wishes came true, the best efforts of most companies is to provide the best service possible and hope that creates loyalty when times get tough.
By Paul Wiseman