CEOs discuss frac crew and equipment difficulties in earnings calls
The Permian basin has been the industry’s heart-throb in recent years, but it’s not immune to growing pains.
If current growth rates continue, the Permian will add about 900 MBOEPD of production from December 2016 to December 2017. This growth exceeds even that of the Eagle Ford before the price downturn, which achieved peak growth of 721 MBOEPD over a 12-month period.
The unprecedented growth from the Permian has led to difficulty securing service crews to drill and complete wells, according to executives from multiple Permian companies. The E&P teams discussed these problems, and their respective companies’ responses, in this quarter’s earnings calls.
Jagged Peak
Jagged Peak (ticker: JAG) Chairman, President and CEO Joe Jaggers said, “We have experienced completion delays related to frac fleet equipment reliability from our service providers and the learning curve of less experienced crews. We have communicated these issues to our service providers, and they are being actively addressed within their individual organizations.”
Deferred maintenance, inexperienced crews slowing completions
Inexperience in new crews is likely at least partially unavoidable, service companies cut large numbers of workers during the downturn, and many of these experienced employees have not returned. Service companies are able to address reliability problems by performing maintenance, but the time this may take can be too costly.
Halliburton
Halliburton (ticker: HAL) President and CEO Jeff Miller mentioned the effect of avoiding maintenance on a typical frac fleet in the company’s conference call.
“A proxy for deferred maintenance and the simplest place to see it is in the industry horsepower per crew size. And while Halliburton continues to operate with an average fleet size of 36,000 horsepower per crew and we have for the last several years, the rest of the industry is now averaging closer to 45,000 horsepower per crew. Deferred maintenance is creating this equipment redundancy on location,” Miller said.
Callon
Callon Petroleum (ticker: CPE) President and CEO Joe Gatto mentioned the delays his company has been experiencing in Callon’s conference call.
“We experienced a higher-than-expected level of production that was offline for our offsetting completions in frac operations by offset operators at Carpe Diem. We also experienced extended cycle times in the quarter due to unplanned downtime from services, such as wireline and coiled tubing operations that support our completions. While I expect these types of issues to be transitory and have seen improvements in cycle times over the last several weeks, the resulting scheduling delays did shift our completion schedule and resulted in a reduction of total wells online for the year.”
Parsley Energy: “Essentially all Permian operators…have seen completions pushed out this year”
Parsley Energy (ticker: PE) CEO Bryan Sheffield discussed his company’s difficulties with completions during his prepared remarks, and further elaborated during the Q&A portion of the call. “Essentially all Permian operators”, Sheffield said, “have seen completions pushed out this year.
For us, this is primarily a function of two things, acquisition-related drilling obligations shifted us to new areas and we experienced delays on our biggest project of the year, the eight-well downspacing pilot we talked about last quarter. And those delays radiate throughout the program. Other than that, we’ve experienced nothing that wouldn’t be expected as part of the normal onboarding process for new rigs and frac crews of which we’ve had more than anyone.”
In the Q&A portion of the call, Sheffield said, “We’ve just seen bottlenecks such as labor. I think that’s well-known right now. The number one issue right now is labor going into 2018. So, fortunately for us, is we’ve got our completion crews set. We’ve got the rigs. It’s set. And so we’re not shuffling. We’re not adding rigs in the first or second quarter of 2018. So I feel like we’re set for the next six to eight months on this front. But there will be labor issues.”
Contango
Contango Oil & Gas (ticker: MCF) President and CEO Allan Keel remarked, “Also as we’ve previously discussed, the Crusader well, which has been drilled is waiting on completion. We’re trying to schedule a time for the frac crew to get there as soon as possible. We don’t think that will be beyond the first year, but we are anxious to get that well on line and producing as fast as we can.”
Spot crews can cost $1 million more
It is important to note, as Joe Jaggers did, that it is not necessarily impossible to get a frac crew on demand, just prohibitively expensive. “We would be able to offset the impact of these delays by deploying additional spot frac fleets”, he said, “but we are unwilling to continue incurring the additional costs associated with these fleets. We have seen the additional costs of spot fleets approach $1 million per well, so we have chosen to be efficient with our capital and to preserve the strongest economic returns possible from our wells.”
Based on EnerCom’s Delaware basin economic model, an extra $1 million in cost would decrease the average Delaware well IRR by about one-seventh. As Jaggers put it, “I’d take that trade any day, saving up to $1 million per well for a delay of a few weeks, because it’s the right thing to do.”
