Low crude prices distress oil field servicers

Small firms, low-yield wells hit the hardest

Special to the New York Times/STEPHEN B. THORNTON
Paul Harrison replaces a hose after offloading a truckload of natural gas well production water at a water recycling center operated by Southwestern Energy near Judsonia, Ark. Thursday Nov. 20, 2014. Southwestern Energy contributed to the funding of the project. Southwestern remains commitment to natural gas production, including Arkansas' Fayetteville Shale play, despite low prices and other companies moving to oil.
Special to the New York Times/STEPHEN B. THORNTON Paul Harrison replaces a hose after offloading a truckload of natural gas well production water at a water recycling center operated by Southwestern Energy near Judsonia, Ark. Thursday Nov. 20, 2014. Southwestern Energy contributed to the funding of the project. Southwestern remains commitment to natural gas production, including Arkansas' Fayetteville Shale play, despite low prices and other companies moving to oil.

U.S. oil producers are starting to cut spending this year and are idling drilling rigs. That's not good news for the oil field services companies that now face the possibility of declining business and layoffs.

The nationwide pullback has the potential to reach into Arkansas, where service and equipment companies face a further slowdown in natural gas drilling in the Fayetteville Shale and the now less-profitable oil wells in south Arkansas.

Low natural gas prices have already driven producers to more profitable shale formations.

"As far as the oil and gas service industry, it hurts terribly, depending on the type of service you are in," said Tommy McWilliams, partner of Production Services Inc. in Magnolia, which provides rig work on already drilled and completed wells along with well plugging and abandonment services.

"When prices get down too low, and you have marginal wells ... like a lot of people in southern Arkansas do, those marginal wells become uneconomical to operate or produce and that does cut down on the amount of work," he said.

Production Services -- which has about 50 employees -- has managed to avoid layoffs.

"Fortunately, we haven't had to," McWilliams said. "I know that our competitor, a local competitor has had to layoff."

But the company has seen its work schedule slow, so "that could be coming in the future for us," he said.

Crude prices have fallen more than 50 percent since last summer as a result of an oversupplied global oil market and waning global demand.

Energy companies in the United States have been pumping out record amounts of oil from shale formations, mainly in Texas and North Dakota.

A worldwide glut of oil deepened on Thanksgiving Day when the Organization of the Petroleum Exporting Countries decided to forgo a cut in its production levels.

The move by OPEC has been called a "price war" by some energy analysts who believe the cartel wants to drive crude prices down in order to curb U.S. shale production.

If that is the case, OPEC has been successful, analysts said.

"You are also seeing the consequences of the OPEC price war," said Phil Flynn an energy analyst with Price Futures Group. "We've seen a dramatic response from oil companies because of the massive dip in prices."

Capital spending plans for 2015 have been gutted by energy companies in response to weak oil prices. BP PLC plans to invest $4 billion to $6 billion less then it originally announced, and Royal Dutch Shell PLC is reducing its spending by $15 billion through 2017.

El Dorado-based Murphy Oil Corp. said last week that the company only expects to spend $2.3 billion this year -- a 33 percent decline from 2014.

This drop in investment and cash flow is putting a lot of oil field service companies under pressure, analysts said, because with a drop in drilling, there is going to be less activity for these companies.

"They are all being hit," said Bill Herbert, an analyst with Simmons and Co. International, who called it a "period of distress" for the industry.

"A lot of those smaller companies may not have the staying power like the big guys," said Aaron Littlefield, president of Littlefield Oil Company in Fort Smith, which provides diesel fuel for oil and natural gas companies at fracking well sites. The fuel is used to run trucks, compressors and other equipment.

"We've not seen the affects of it yet," he said, adding, "The slowdown's coming."

Energy companies idled 94 oil rigs in the United States during the week that ended Jan. 30 -- one of the biggest withdrawals of rigs in years, according to oil field information service Baker Hughes.

The oil field services industry requires a lot of specialized equipment, and it gets sidelined when exploration and production tapers, McWilliams said.

"There you are with a bunch of equipment that you can't utilize," he said. "That's when the problems really start."

Despite the drop in drilling rigs, a weekly report by the U.S. Energy Information Administration on Wednesday showed that the nation's crude stores grew for yet another week, with inventories rising 6.4 million barrels to 413.1 million barrels.

"We are of the belief that in the second half of 2015 we will start seeing a fairly considerable deceleration of U.S. production growth," Herbert said.

So far, the district office for HB Rentals in Menifee in Conway County has avoided the negative effects of volatile oil prices, said Gary Owen, district operations manager for the company, a subsidiary of Superior Energy Services Co. in Menifee.

The company provides accommodations, such as housing and sewer and water systems, for employees working on drilling rigs in the Fayetteville shale.

"[Southwestern Energy Co.] is definitely cutting back a little bit," Owen said. "They are moving some of their rigs to West Virginia so there is going to be some slowdown in the Fayetteville Shale."

Southwestern Energy Co., the main operator in the shale, recently acquired assets in the Marcellus and Utica shales in the Northeast. The company is moving at least one of its rigs in Arkansas to the Northeast, said Christina Fowler, spokesman for the company.

Drilling in the Fayetteville Shale has slumped in recent years despite the nation's shale boom as the three main operators in the state have shifted their focus to other formations that are rich in oil and natural gas liquids, which are more profitable than the dry gas found in north central Arkansas.

The number of drilling rigs in the Fayetteville shale began to drop off when natural gas prices fell below $2 per 1 million Btu in 2012. A small rise in prices since then failed to generate more drilling because of an abundant supply from other areas. There are now only nine drilling rigs in the state, according to Baker Hughes.

Other than Southwestern, other operators in the state include BHP Billiton Ltd. and Exxon Mobil's XTO Energy.

And BHP Billiton is currently looking for a buyer for its Fayetteville Shale assets. The company's presence in the Fayetteville Shale has waned in the past few years, as it has reduced the number of drilling rigs in the state to zero, according to a recent report.

HB Rentals, which employs 14 people in the state, also works with XTO Energy, which has one rig in the state, Owen said.

"We've heard different stories about whether they are leaving or staying," he said.

Owen, who said he expects to see activity in the shale drop off in the next few weeks, said the only way to prepare for drop in activity is to be "as efficient as you possibly can with everything that you do."

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