Onshore Rig Count New Onshore Well Count September Edition: The Next Wave for Service Companies The September edition explores trends in rotary and workover/well service rig counts, new well additions, depletion rates, oilfield service market segment spending, and the implications for oilfield service providers. While production from shale wells has contributed significantly to domestic production gains and spurred increasing talk of U.S. energy independence, it has also raised questions regarding depletion rates, sustainability of production, and the requisite level of drilling activity needed to maintain (or increase) production levels. As domestic drilling activity continues to ramp up, the U.S. is once again approaching the unprecedented levels of annual new well completions that were witnessed prior to the recession of 27/28. The primary benefactors of this growth to date have been drilling and completion phase service providers; however, an often overlooked result from the ever increasing inventory of producing wells is the ensuing demand for production-phase services as these new wells require workover or remediation operations. New Well Additions. After drilling approximately 45,488 new onshore wells in 213, the U.S. is projected to add an additional 46,523 in 214, bringing the existing base of active wells to a total of approximately 1,48,. Additional detail: Despite the overall decline in the onshore rig count since its 212 peak of 1,871, the onshore rig count has begun to increase once again and is projected to reach 1,941 by the end of 214, the highest level in U.S. history Furthermore, the rate at which new wells are being drilled continued to increase even as rig count fell, due primarily to increases in drilling and completion efficiency and the adoption of pad-drilling and walking rigs, allowing for more wells to be drilled per rig 2,25 2, 1,75 1,5 1,25 1, 75 5 25 U.S. Onshore Rig Count vs. New Onshore Wells 63, 56, 49, 42, 35, 28, 21, 14, 7, Prepared by: Duane Donner ddonner@foundersib.com Joe Brady jbrady@foundersib.com John Ortstadt jortstadt@foundersib.com Brandon Pilot bpilot@foundersib.com Ben New bnew@foundersib.com U.S. Active Well Count (in Thousands) 1,34 1,48 558 575 475 474 213 214P Oil Gas Total *Projection includes wells abandoned Source: Spears & Associates Onshore Rig Count New Onshore Wells Source: Spears & Associates 1
Bbl. Oil / Day 1Q '9 2Q '9 3Q '9 4Q '9 1Q '1 2Q '1 3Q '1 4Q '1 1Q '11 2Q '11 3Q '11 4Q '11 1Q '12 2Q '12 3Q '12 4Q '12 1Q '13 2Q '13 3Q '13 4Q '13 1Q '14 2Q '14 Count Utilization Impact on Well Service/Workover Rig Count Activity. The well service/workover rig count followed roughly the same trend as the rotary rig count, peaking in 212. Just as drilling efficiencies have disconnected the lockstep between rig count, new well count, and oil and gas production, we suspect a similar divergence will take place with rotary and workover rig counts. 22 Well service/workover rigs are used not only to complete new wells, but also in well intervention operations for existing wells. With the boom of recent activity in the US shale plays, we expect workover rig count will likely benefit as the existing shale wells mature and require production-phase servicing (remediation). Further detail: Well Service/Workover Rig Count & Utilization Rate 75% A workover rig in West Texas 21 2 19 7% 65% 6% 18 17 16 15 Well Service/Workover Rig Count Utilization Rate The growing demand for well service/workover rigs during the post-29 recovery has been largely met by increases in utilization of existing rigs, rather than additions of new rigs According to Spears & Associates, the U.S. well service/workover rig count is projected to rise 2% in 214 to an average of 2,97 active rigs, but with approximately 536, new wells drilled in the US in last 1 years we ll look to depletion rates to help determine the future growth of the well servicing segment Completion, Depletion, Workover & Recompletion. Though newly fracked wells have driven U.S. oil production up 39% since 211, precipitous depletion rates in shale wells pose future opportunities for production-related solutions and services. Further detail: According to Pete Stark, Senior Research Director at HIS Inc., the average flow from a shale gas well drops by about 5% to 75% in the first year, and up to 78% for oil wells Faster decline rates in shale wells increase the likelihood of remedial operations in the near-term, such as replacing the tubing with a narrower diameter tube to increase pressure and restore flow rates As fracking technology continues to progress with advancements such as the Schlumberger HiWAY Flow-Channel Fracturing Technique, aging shale wells experiencing major declines in production increasingly become targets for well intervention services in order to restore or optimize production 55% 5% 45% 4% Source: Guiberson THE AVERAGE FLOW FROM A SHALE GAS WELL DROPS BY ABOUT 5 PERCENT TO 75 PERCENT IN THE FIRST YEAR, AND UP TO 78 PERCENT FOR OIL Bakken Hz. Well Decline Curve (3,694 Samples) Years from First Production Source: HPDI, Bernstein Research - PETE STARK, SENIOR RESEARCH DIRECTOR AT IHS INC. 2
Well Service/Workover Spending. According to Spears & Associates, the decline in the well service/workover market segment as drilling slowed in 28/29 was exaggerated by completion delays imposed by oil and gas producers that were delaying completing new wells during a low commodity pricing environment. Consequently, the market segment experienced outsized gains in 21-212 due to the resurgence of drilling activity coupled with the additional completion work on the backlog of uncompleted wells. Further detail: 6.% Sector Growth (%) 13.1% 12.8% 8.% 5.7% 213 214P 7.9% THE RAPID RETURN TO GROWTH IN LATE 21 THROUGH EARLY 212 WAS DRIVEN PARTLY BY OIL & GAS COMPANIES TRYING TO BRING ON STREAM ALL NEWLY DRILLED WELLS, PLUS THOSE WELLS WHICH HAD BEEN HELD OFF THE MARKET - SPEARS & ASSOCIATES Well Service/Workover Completion Equip. & Services Total Oilfield Services Global Spending 29 21 211 212 213 214P Well Service/Workover $3,139 $4,45 $5,48 $6,5 $6,415 $6,928 % Growth 28.9% 33.7% 11.9% 6.% 8.% Completion Equip. & Serv. $6,156 $7,39 $8,652 $1,595 $11,986 $13,524 % Growth 14.3% 22.9% 22.5% 13.1% 12.8% Total Oilfield Services $251,826 $271,57 $328,858 $365,654 $386,352 $417,45 % Growth 7.6% 21.3% 11.2% 5.7% 7.9% *All $ in Millions Source: Spears & Associates Though spending on completion equipment & services has maintained strong growth since 28, it too saw outsized growth due to the backlog of uncompleted wells following the recession 214 projections indicate an increasing rate of spending growth in the well service/workover segment from 6.% in 213 to 8.% in 214, and slowing spending growth in the completion equipment & services segment, declining from 13.1% in 213 to 12.8% in 214 South Texas Wellhead Sunset Summary Remarks. With the U.S. oil and gas drilling market continuing to increase the rate of annual new well additions, the existing base of producing wells and potential market for production phase oilfield services continues to grow. As the drilling and completion markets continue to garner the lion s share of E&P spending on shale formations, spending growth on existing well servicing is lagging. We expect a continued pick up in growth for production-phase services as new shale wells begin to require workover and re-stimulation operations, and a corresponding increase in well service/workover rig counts inorder to meet this demand. 3
Select M&A Transactions Announced Date Target/Issuer Buyers/Investors Total Transaction Value ($USDmm) 9/21/214 Dresser-Rand Group Inc. (NYSE:DRC) Siemens Energy, Inc. 7,621.46 9/17/214 Pioneer Fishing & Rental Services, LLC Basic Energy Services, Inc. (NYSE:BAS) 16. 9/15/214 CWC Energy Services Corp., Snubbing Assets and Business - 5.88 9/15/214 Technip SA, North American Diving Assets Ranger Offshore, Inc. - 9/12/214 Hyduke Machining Solutions Inc - - 9/11/214 Layne Christensen Company, Integra Disc Filtration System Next Fuel, Inc. (OTCPK:NXFI).9 9/11/214 UTEC Survey Inc. Acteon Group Ltd. - 9/9/214 UELS, LLC Norwest Equity Partners - 9/9/214 Big Lake Services Company, LLC Beckman Production Services, Inc. - 9/8/214 American Well Service LLC Extreme Plastics Plus, Inc. - 9/3/214 Rex Technology Management Ltd REX International Holding Limited (Catalist:5WH) 8.5 9/3/214 Bolt Technology Corp. (NasdaqGS:BOLT) Teledyne Technologies Inc. (NYSE:TDY) 192.1 8/28/214 The NACHER Corporation Mistras Group, Inc. (NYSE:MG) - 8/26/214 Cust-O-Fab, Inc. White Deer Energy - 8/21/214 Pipeline Services International LLC Brown Integrity LLC - Source: CapitalIQ 4
Commodity Prices 11. Crude Oil - WTI 15. 1. 95. 9. 85. 8. Price Crude Oil ($ per bbl) 92.62 93.36 11.9 (.8)% (9.1)% 6. Natural Gas - Henry Hub 5. 4. 3. 2. 1.. Price Natural Gas ($ per MMBtu) 4.3 4.4 3.56 (.2)% 13.2% Source: CapitalIQ 5
Rig Counts 2,5 Onshore Rig Count 2, 1,5 1, 5 Rig Count U.S. Onshore 1,931 1,914 1,744.9% 1.7% 2 18 16 14 12 1 8 6 4 2 Offshore Rig Count Rig Count U.S. Offshore 62 66 64 (.1%) (.%) Source: Baker Hughes 6
Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Rig Counts (continued) U.S. Rig Count by Basin Permian 2,5 Eagle Ford Williston 2, Marcellus Mississippian 1,5 Granite Wash Haynesville 1, DJ Niobrara Utica 5 Cana Woodford Barnett Fayetteville Arkoma Woodford Ardmore Woodford Others U.S. Rig Count by Basin U.S. Rig Count by Basin YTD Change Permian 556 Permian 88 Eagle Ford 27 Eagle Ford (21) Williston 198 Williston 13 Marcellus 8 Marcellus (5) Mississippian 77 Mississippian 2 Granite Wash 66 Granite Wash 14 Haynesville 46 Haynesville 3 DJ-Niobrara 63 DJ-Niobrara 13 Utica 44 Utica 6 Cana Woodford 38 Cana Woodford 2 Barnett 22 Barnett (12) Fayetteville 9 Fayetteville Arkoma Woodford 7 Arkoma Woodford 2 Ardmore Woodford 5 Ardmore Woodford (5) Others 513 Others 8 Source: Baker Hughes 7
Rig Counts (Cont.) 1,8 1,6 1,4 1,2 1, 8 6 4 2 U.S. Oil vs. Natural Gas Rig Count Oil Rig Count Gas Rig Count Rig Count Oil 1,592 1,575 1,362 1.1% 16.9% Natural Gas 338 338 376.% (1.1%) 14 Gulf of Mexico Oil vs. Natural Gas Rig Count 12 1 8 6 4 2 Gas Rig Count Oil Rig Count Rig Count Oil 45 45 44.% 2.3% Natural Gas 14 17 18 (17.6%) (22.2)% Total Gulf of Mexico 59 62 62 (4.8%) (4.8)% Source: Baker Hughes 8
Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 (Mm bbl/day) Domestic Production 1. 9. 8. 7. 6. 5. 4. 3. 2. 1.. Crude Oil Production Million Barrels per Day Aug Prior Month Prior Year Prior Month Prior Year Crude Oil 8.57 8.54 7.45.35% 15.% 71. 7. 69. 68. 67. 66. 65. 64. 63. 62. Dry Natural Gas Production Billion Cubic Feet per Day Aug Prior Month Prior Year Prior Month Prior Year Dry Natural Gas 7.33 7.2 66.98.2% 5.% Source: EIA 9
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