Halliburton Co. (HAL) and Schlumberger Ltd. (SLB) may have the power to charge higher prices for their oilfield services through 2012 thanks to a backlog of unfinished oil and natural-gas wells that tripled in the past year.
The number of onshore wells in the U.S. and Canada waiting in line for the workers and equipment needed to complete them for production has risen to 3,500 from 1,145 in the second quarter 2010, according to a Halliburton count. Producers are seeing delays as long as six months.
The North American onshore drilling boom, driven by companies rushing to exploit shale-rock formations, sent demand skyrocketing for oilfield services such as hydraulic fracturing that cracks the rock to release gas and oil. Rigs drilling on land in the U.S. increased by 20 percent in the past year to 1,833 today, according to Baker Hughes Inc. (BHI) data.
Servicers are “like the people that sold the picks and shovels during the gold rush in California,” said Allen Brooks, managing director with Houston-based investment bank Parks Paton Hoepfl & Brown.
The swelling backlog of wells to be completed gave oilfield services companies the power to raise prices more than 16 percent last year. It may accelerate consolidation in the industry as companies expand to meet demand, said Brian Uhlmer, an analyst at Global Hunter Securities in Houston.
The Philadelphia Oil Service Sector Index (OSX), a group of 15 names, has climbed 46 percent over the past year, while the Standard & Poor’s 500 index is up 17 percent, and the S&P’s explorers and producers index has risen 24 percent.
Halliburton, Schlumberger and Baker Hughes, the largest providers of hydraulic fracturing services in the U.S. with more than 1 million horsepower each in pressure pumping equipment, are expected to expand earnings 46 percent this year to an average of $3.62 per share, and another 33 percent in 2012, according to analyst estimates compiled by Bloomberg.
New technology allows rigs to punch holes in the ground faster, while advanced production techniques mean it takes longer to finish the well, including multiple rounds of hydraulic fracturing that injects a mixture of water, sand and chemicals into the well to break open the rock so oil and gas can flow.
Demand for so-called fracking may continue to exceed supply into 2013, Uhlmer said.
‘Can’t Get Enough’
“Right now our customers can’t get enough of us,” Mark McCollum, chief financial officer of Halliburton, told analysts and investors on May 24. “There’s really been no discussions on any customers’ point of slowing this process down for the foreseeable future.”
Explorers and producers are expected to spend $122 billion in the U.S. this year, 22 percent more than last year, James Crandell and Omar Nokta, analysts at Dahlman Rose & Co., wrote in a June 7 note to investors.
Whiting Petroleum Corp. (WLL), a Denver-based oil producer, has seen a 10 percent increase in total well costs in North Dakota’s Bakken Shale in the past year, John Kelso, director of investor relations, said. The biggest driver of the increase is a 20 percent to 30 percent jump in the cost of fracking, he said.
Revenue from pressure pumping, used in fracking onshore wells, should surpass offshore drilling this year to become the largest segment in the equipment and service industry, according to a May 31 note to investors from Global Hunter, citing Spears & Associates.
Improved technology has helped producers offset some of the service cost increases by saving money on the drilling phase. Hi-tech rigs have shaved roughly 40 percent in the past four years off the time it takes to drill a well in the Bakken, rig owner Helmerich & Payne Inc. (HP) has said.
Southwestern Energy Co. (SWN), the most active driller in Arkansas’ Fayetteville Shale, sped up drilling in the formation to an average 8 to 9 days this year from 10 to 11 days in 2010. That’s partly due to clustering up to 10 wells, all drilled horizontally in different directions from the same drilling site, known as a pad. Previously, it took days to move a rig miles to drill on different sites before leases expired.
“When you’re on the pad, you can move to the next well in two hours,” said Brad Sylvester, vice president at Southwestern Energy said. Faster drilling has allowed Southwestern to keep average well costs flat at $2.8 million, he said.
Speeding the Drill
In Texas’ Eagle Ford Shale, where deeper deposits take longer to reach than shallower formations, Petrohawk has cut its drilling time to 30 days from 38, Joan Dunlap, the company’s vice president, said. It means the company can use 14 rigs, which can cost more than $25,000 a day, instead of 15 to meet its drilling goals this year.
Servicers and drillers must add 19,000 new workers, a 35 percent jump, to meet demand by the end of 2012, said Global Hunter’s Uhlmer. Halliburton, Schlumberger and Baker Hughes are expected to expand their offerings by at least 30 percent, according to Global Hunter.
Basic Energy Services Inc. (BAS) said June 2 it signed a letter of intent to spend $180 million to buy the Maverick group of companies, which provides fracking services.
As many as 10 venture-capital and private equity firms are shopping among roughly 100 “mom and pop” oilfield service firms to consolidate into larger companies about $1 billion in size, said Charles Swanson, managing partner of the Houston office for Ernst & Young LLP, which audits the targeted companies for buyers.
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