Highly specialized, mobile rigs are literally walking over the oil patch’s collection of aging equipment — tamping down sales and profits in a burst of efficiency that’s making some drillers victims of their own success.
Large oil field services companies deploy the pricey machines called walking rigs to grab customers from mid-sized drillers that have to stretch to afford replacing their drilling armadas with the new generation gear.
But the market’s getting tighter for drillers large and small, as producers embrace walking rigs — so-called for the massive mechanical feet that let them move among well sites — and other technologies that allow them to drill more wells and harvest more oil while spending less on oil field services.
Baker Hughes recently reported a 9 percent rise in the number of wells the average U.S. land drilling rig produced in the fourth quarter, compared with the same period a year ago.
“They’re drilling themselves out of the job,” said Tanjila Shafi, an analyst with S&P Capital.
The new rig efficiencies are among the tech-nological advances that have revolutionized the U.S. energy scene by boosting production in once-inaccessible shale and tight rock formations.
Land drillers like Houston-based Nabors Industries and Tulsa, Okla.-based Helmerich & Payne have had to replace rigs in order to keep up with larger rivals that are supported by high global profits and multibillion-dollar research and development budgets, said Jim Rollyson, a Raymond James analyst.
Rollyson said some new rigs can cost about $20 million — up to twenty times the rig price a decade ago.
The new mobile rigs have surpassed the older units among active U.S. land rigs, now numbering more than 650 against 500 conventional rigs, according to Helmerich & Payne.
Several advances, including automation that reduces the need for rig workers and drill bits built for specific shale plays, have persuaded oil companies to discard the older models.
It’s paying off: Shale oil producers have been able to boost their output on average 600 per-
cent for every rig they use, according to the Energy Information Administration.
That lets them cut down on oil field spending even as they collect more crude — which isn’t good news for drilling contractors.
Combined year-over-year revenue for eight major North American land drillers was flat at $4.8 billion in the third quarter of 2013 compared with the same year-ago period, and their North American sales mostly declined, Bloomberg data show.
As the industry shifts to more complex, more expensive horizontal drilling, major oil and gas producers are willing to pay more for the most efficient drilling rigs and technology available, because they save in the long run by cultivating a cost-effective process, said Ahmed Mousbah, director of marketing and business development at Baker Hughes.
That efficiency also is heating up competition among Baker Hughes and the other three largest services companies, and pushing them to reach for market share from among smaller rivals, especially in North America.
The top four in order of sales — Schlumberger, Halliburton, Baker Hughes and Weatherford International — collected an average 2 percent increase in North American revenue in the third quarter of 2013, while their international sales climbed 12 percent. Those firms also made 44 percent more revenue on international rigs than North American rigs, according to data compiled by Bloomberg.
On Friday, Schlumberger — the first of the four to report fourth-quarter and full-year earnings — said its overall revenue grew
7.5 percent last year, more than twice the growth rate in North America.
The trickle-down from that tough environment affects the fortunes of services companies’ suppliers like Tolteq, a downhole equipment maker based in the Austin suburb of Cedar Creek.
Demand for what those companies make rests on the number of rigs that producers use. Tolteq, which builds technology that guides drill bits and captures geological data in an oil well, saw booming growth when companies began drilling horizontally in shale plays.
“You have to know which direction you’re going,” said Paul Deere, who in 2003 decided to start building and selling tools that can sketch out various measurements in an oil well. “We were able to meet a need right as it was growing.”
When Deere started his business a decade ago, only a few rigs used such equipment; now, nearly every U.S. rig does. The company made Inc. Magazine’s list of the 500 fastest-growing U.S. private companies two years in a row.
But that didn’t prevent the slowdown Tolteq saw as rig counts flattened last year, Deere said.
Denny Smith, director of corporate development for Nabors, said the oil field services market has softened because supply has outweighed demand for more than a year, and Wall Street analysts have missed the mark several times in predicting a rebounding rig count.
“There seemed to be a significant ramp up in spending coming, but now we have a more tempered view,” he said. Nabors’ U.S. drilling and rig services revenue dropped to $492 million in the third quarter, down 12 percent from the same period a year ago.
Walking rigs were born of an even more prominent driver of modern drilling efficiencies — temporary rig foundations called pads that allow operators to drill multiple wells using one rig.
Pad drilling, originally adopted by operators in rough environments like the Rocky Mountains, spread to the Barnett Shale and other plays as natural gas prices fell and cost-cutting became paramount.
It allows companies to skip the laborious steps of setting up a rig over a well site and then hoisting it off, said Patrick Hladky, president of Colorado-based rig contractor Cyclone Drilling.
Oklahoma City-based Continental Resources, the largest operator in North Dakota’s Bakken Shale, said it has in recent years increased the number of wells it could drill per pad site from four to 14.
Today, more than 70 percent of shale play rigs use pads, a sign that producers know they should cut costs: Oil companies will likely end up drilling hundreds of thousands of wells over the life of a shale play, said Phani Gadde, an analyst with Houston-based Wood Mackenzie.
From days to hours
“In the past, you would talk about how many days it would take to move a rig,” he said. “Now they talk about how many hours it takes.”
The government has recognized the change in its number-crunching: In October, the U.S. Energy Department began releasing a report that combines the traditional rig count with the number of wells each rig drills.
A disheartening sign
Earlier this month, analysts with Cowen and Co. wrote that, based on its annual survey of oil and gas producers, spending on North American exploration and production would grow by just 4 percent in 2014. It was a disheartening sign for oil field service companies, months after Cowen’s initial projection of 8 percent growth.
And Houston-based market intelligence firm PacWest Consulting Partners last month predicted that this year’s fleet of active drilling rigs will sink 15 percent below the level in 2013, even while they bore more than 15,800 horizontal wells, the highest number ever.
Every business goes through cycles, but the constraints that new drilling efficiencies have put on smaller oil field service companies are more challenging than past problems because it’s not clear when the pace of change will slow.
Ultimately, though, oil companies hire the service companies they trust to get the job done, said Hladky of Cyclone Drilling.
“It comes down to people and planning,” he said. “A rig is just a tool.”
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