Current WPX Stock Info

Themes from EnerCom Dallas: Service costs are coming up 10%-15%

EnerCom Dallas is bringing together oil and gas company executives from all across the hemisphere, and while the companies differ in many important ways, some universal concerns exist among each. With the first day of EnerCom Dallas in the books, patterns are beginning to emerge, and the sentiment that the E&Ps keep echoing is “service costs are going up.”

Over the course of the downturn, lower oil prices and less drilling put downward pressure on the service industry, with many companies in the oilfield service sector cutting costs to remain competitive. As prices recover and drilling resumes, prices are going to rise, and E&P companies are already preparing for what’s coming down the pipes.

The fact that prices would rise is not a surprise to anyone who is drilling new wells. A healthy oil industry requires a healthy service sector, and operators knew that as drilling increased, so would costs, but the real question was by how much.

“Price inflation from service costs for us would be 10% on the high side, but we’ve heard everything from 10% to 20%,” WPX Energy (ticker: WPX) CEO Rick Muncrief said in the company’s breakout session.

During the company’s presentation, Muncrief explained that the company has contracts in place to control 70% of WPX’s drilling and completion costs. Services like sand, water and stimulation are all under contract, leaving the WPX largely unexposed to cost inflation from services.

WPX Service cost exposure

Companies are thinking ahead

Over and over, the heads of E&Ps from both the U.S. and Canada repeated that prices were coming up between 10 and 15 percent. As oil remains above $50 per barrel, and companies think about healthy growth coming out of the downcycle, decision makers are already starting to work in assumptions of higher costs on the completions side.

Companies like Pioneer Resource Development (ticker: PXD) are already looking at ways to control completion costs as much as possible. During the company’s breakout, Pioneer Natural Resources EVP Ken Sheffield highlighted the fact that the company does some of its service work in-house when asked about how PXD is keeping down costs.

The number one cost controller for Pioneer is vertical integration, said Sheffield. “We have our own pressure pumping company and we have our own sand mine.” The company has also been able to use automation to keep headcount flat even as operations begin to grow, also ensuring that costs remain low.

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