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Oil Service Costs Continue Inexorable Rise
A preliminary review of recent earnings releases and management commentary indicates that oil service costs continued its inexorable rise during the third quarter of 2010, with the highest inflation for fracturing services.
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Increased Cost
Newfield Exploration Company (NYSE:NFX) reported during its third quarter of 2010 earnings conference call that the company was seeing large price increases for oil services, specifically in the Eagle Ford Shale and Williston Basin. Lee Boothby, the CEO of Newfield Exploration Company, said, "Cost increases have come in the form of pressure pumping, day rate increases, oil country tubular goods price increases." Boothby added that the price increases fell within a range from 15% to 45%.
Vertical Integration
Other companies are dealing with the relentless oil service cost inflation through other means. Pioneer Natural Resources (NYSE:PXD) is vertically integrating its operations, and plans to be internally providing a large part of its service needs.
In the Spraberry field, Pioneer Natural Resources hopes to provide between 30% and 60% of its oil service requirements by 2012. The company has two company-owned fracture stimulation fleets working here, and has two more under order. Pioneer Natural Resources also owns hundreds of frac tanks and has its own fleet of nine drilling rigs. The company estimates that it would save as much as $300,000 per well here through vertical integration.
Pumping Up the Prices
Cabot Oil and Gas (NYSE:COG) is seeing higher costs and recently increased its 2010 capital budget by $65 million. The company cited higher costs for pressure pumping services.
Cabot Oil and Gas also established a capital budget of $600 million for 2011, and, anticipating further increases next year, the company built in a 5% to 10% increase in oil service costs for that year. This may prove to be too conservative, given the level of activity going on in the onshore areas of the United States.
Some companies are dealing with higher service costs by reducing drilling if the higher costs reduce the economics of the play. EnCana Corporation (NYSE:ECA) has deferred capital expenditures originally planned for the Haynesville Shale in 2010. The company cut $200 million from its drilling program for 2010, reducing net wells in the Haynesville Shale from 110 to 90 for the year.
This was a courageous act by EnCana, as it caused the company to reduce its production guidance for 2010, which no doubt upset short-term investors. However, the company chose to act rationally for the company's long term benefit.
The Bottom Line
Oil service and rigs costs continued its upward trajectory during the third quarter of 2010, and companies dealt with the phenomenon in different ways, ranging from reduced activity to partial vertical integration. (To learn more, see our Oil & Gas Industry Primer.)
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Increased Cost
Newfield Exploration Company (NYSE:NFX) reported during its third quarter of 2010 earnings conference call that the company was seeing large price increases for oil services, specifically in the Eagle Ford Shale and Williston Basin. Lee Boothby, the CEO of Newfield Exploration Company, said, "Cost increases have come in the form of pressure pumping, day rate increases, oil country tubular goods price increases." Boothby added that the price increases fell within a range from 15% to 45%.
Vertical Integration
Other companies are dealing with the relentless oil service cost inflation through other means. Pioneer Natural Resources (NYSE:PXD) is vertically integrating its operations, and plans to be internally providing a large part of its service needs.
In the Spraberry field, Pioneer Natural Resources hopes to provide between 30% and 60% of its oil service requirements by 2012. The company has two company-owned fracture stimulation fleets working here, and has two more under order. Pioneer Natural Resources also owns hundreds of frac tanks and has its own fleet of nine drilling rigs. The company estimates that it would save as much as $300,000 per well here through vertical integration.
Pumping Up the Prices
Cabot Oil and Gas (NYSE:COG) is seeing higher costs and recently increased its 2010 capital budget by $65 million. The company cited higher costs for pressure pumping services.
Some companies are dealing with higher service costs by reducing drilling if the higher costs reduce the economics of the play. EnCana Corporation (NYSE:ECA) has deferred capital expenditures originally planned for the Haynesville Shale in 2010. The company cut $200 million from its drilling program for 2010, reducing net wells in the Haynesville Shale from 110 to 90 for the year.
This was a courageous act by EnCana, as it caused the company to reduce its production guidance for 2010, which no doubt upset short-term investors. However, the company chose to act rationally for the company's long term benefit.
The Bottom Line
Oil service and rigs costs continued its upward trajectory during the third quarter of 2010, and companies dealt with the phenomenon in different ways, ranging from reduced activity to partial vertical integration. (To learn more, see our Oil & Gas Industry Primer.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
by
Eric Fox
Eric J. Fox, CFA, is a freelance financial writer and has previous experience working in the asset management industry as an equity analyst and portfolio manager on the buy side. His favorite area to write on is the energy sector and he keeps current on the industry by reading Haynesville Shale, Permian Oil and Gas and various other blogs.
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