By Paul Wiseman
Since the downturn began in earnest in early 2015, it seems service companies have been falling like a long row of dominoes. It seems those with the worst balance sheets began falling right away, with others following helplessly along the way.
What characterizes those still standing? For companies like Cudd Energy Services and Standard Energy Services, it’s all in the balance sheet. Not only have they avoided debt, they managed to set aside some funds to carry them through leaner times. Cudd’s General Manager, Clint Walker, said his company has close to $65 million in the bank. He noted that he saw the first warning signs of a prolonged downturn in October of 2014, and began to take appropriate measures at that time.
All activity is down, with the slight exception of workovers, and the work that does come in pays much less than it did in 2014. Service companies like Cudd are caught in the middle, with their clients demanding lower costs, which causes Cudd to ask the same of their own suppliers.
“You get cost reductions from your vendors, but that only goes to a certain point. You don’t want to run your vendors out of business either,” he said, while acknowledging that his own company needs to make enough from jobs to have some kind of positive cash flow.
“You can go slightly-positive or break-even at the well site—but there are competitors out there that are doing it for less than break-even cost, just to try to keep the doors open,” he continued. When looking at the below-breakeven billing, Walker said, “You scratch your head and wonder, how are these guys doing it?”
And it’s not that no one thinks the business will rebound. In fact, that’s why preventive maintenance (PM) is now even more important than ever—in order to be ready for the next boom.
Cudd currently has about 30 percent of its horsepower “warm stacked” in Arkansas. In warm stacking, the equipment is not in the field but is assembled, operated and PM’ed on a regular basis to prevent rust and other issues that come with cold stacking. This way, when the business begins to turn around, everything will be ready. This is a precaution Walker says they’ve learned the hard way in previous boom-bust cycles.
Cudd is not alone in turning to PMs as cost saving measures. Canada-based Alert Systems Ltd. specializes in training clients how to maximize the value of their PM systems by doing them neither too often nor too rarely, said founder and owner Bernie Wiebe. While Wiebe’s business is not immune to the effects of the downturn, he’s finding somewhat more open ears during this time.
“It’s like this,” he said. “When it’s busy, nobody has time; now, nobody has the money” to get trained and do preventive maintenance. A look at the company’s client list on their website shows a preponderance of drilling companies all of which, presumably, are indeed short cash. But Wiebe is encouraged that one large independent in the Permian Basin is seeing the PM light and hiring him to revamp their PM systems and train employees on proper schedules and methods, which Wiebe says can save millions of dollars.
“They’re learning that their ‘best practices’ were built on myths and wrong information. Now they’re rethinking how to do maintenance. They were easily leaving millions of dollars on the table.”
Surprisingly, more isn’t necessarily better in the preventive maintenance realm, says Wiebe. For example, with a proper filter and reliable lab testing, most vehicles can go up to 50,000 miles between oil changes, with the oil as clean as it was the day it was put in. He noted that his Basin client was often scheduling technicians to do PMs while they were onsite because it was convenient, not because it was due, costing extra dollars in time and replaced parts.
Of course, putting it off too long can lead to breakdowns that cost money not only in parts and labor, but in lost production, which can be the costliest loss of all.
“It almost sounds like a contradiction, but when things are slow like they are now, it’s the more progressive companies that are gonna look at increasing their efficiency,” he said, which includes best use of their workforce as well as keeping machinery running. “The other ones, they’re just burying their heads in the sand and hoping that the price of oil is going to go up.”
Wiebe also cited a drilling company client who asked him, “Do you know why we’re busy when the competition is laying off people? It’s because our equipment is reliable. We’ve put into place all the steps necessary to keep it that way.” The driller told him their downtime was 0.5 percent as opposed to their competition’s 15-17 percent. The driller continued, “We can simply bid our services lower than they can and still make money.” Over a period of time, the increased up-time amounts to running an extra rig—without paying for one.
Like Cudd’s Walker, Wiebe feels that simply stacking idled drilling rigs is a recipe for destruction, noting that continued oversight and maintenance keeps motors from seizing and parts from rusting, preserving the company’s investment in equipment and making them ready for the next boom.
For Standard Energy Services, having no debt and refocusing on their core business region has been the key to survival. Company CEO Pieter Bergstein said, “Our survival is based on us being debt-free. We’ve never expanded too fast or borrowed money for equipment.” Relying instead on steady, pay-as-you-go growth, the company has held onto its entire field force during the bust, laying off only a few office personnel.
While the well service side is lagging, Bergstein said their vacuum trucks and related services are still active. Some clients are still operating under hedge agreements, paying them [the clients] more than $70 per barrel. This has allowed those clients to make money developing good fields that are still making them money at the lower prices. The clients hurting the most are those with stripper wells near towns like Post and Snyder. “At 3-5 barrels per day, these wells are on the verge of being shut in,” he said, adding that one equipment breakdown could be the death knell for any well like this.
Lubbock-based Standard has 17 locations, all in West Texas and Southeast New Mexico, a much smaller footprint than they had previously had. “We’ve been all over—in California, Wyoming, North Dakota, and South Texas. But we’ve just stayed in West Texas and eastern New Mexico.” In its early days the company was involved in the famed Exxon Valdez cleanup, getting out of Alaska just before the winter season hit.
Currently, offices are in such Basin locations as Andrews, Monahans, Pecos, Hobbs, Seminole, Abilene, Post, and Big Spring along with their Lubbock headquarters.
Many of the basins Standard vacated are now hurting much worse than the Permian Basin—most of which are much newer fields. Aware of the irony, he observed, “The Permian Basin is a great field. It doesn’t give up its oil all at once. There is still three-to-four times as much oil in the ground as we’ve recovered. It gives up its oil over long periods of time—hopefully long enough for my kids to enjoy it.”
Bergstein got into the oil business in the early 1980s after a brief career in banking. He loves the outdoors nature of the oil business, spending at least half of every day out of the office and in the field, as opposed to the in-office nature of banking. But his bank training has come in handy during this downturn. “I never thought I would use my banking background as much as I have in the last three years,” he laughed.
He lamented the fact that many other service companies—probably lacking Bergstein’s banking acumen—have already gone under, with more to come in the next 90 days if there’s not a sudden price resurgence.
Those who accept today’s challenges and get creative have the best chance of success, according to Cudd’s Walker. “I think the most important thing, as a service company, you can do, is get out there and be very creative in your sales effort and get as much acceptable and profitable revenue as you can right now. You can only reduce your costs so much till you get to a point where you start imploding.”
Even that depends on there being some business to go after. As oil prices continue to be in danger of reaching 10-year lows and producer activity continues to diminish, there’s only so much a service company can do. “The thing that keeps me up at night is, I think that we’ll be able to manage all these things… but I can’t go out and make our customers drill a well. So if the activity levels drop to nothing—which they’re headed in a negative direction—there’s gonna be a lot of bass in the fish pond looking for a couple of minnows.”
Paul Wiseman is a freelance writer living in Midland, Texas.