Tickers in this Article: QEP, NFX, BHI, SLB
As expected, exploration and production companies reported the usual cost inflation during the first quarter of 2011, with the degree of inflation dependent on both the service line being utilized and the basin being developed.

TUTORIAL: All About Inflation

Customers
Newfield Exploration (NYSE:NFX) reported a 5-10% increase in oil service costs in onshore areas of the United States during the first quarter of 2011. The company said that the cost inflation impacted pressure pumping, steel costs and transportation services. This inflation was more notable in the Williston Basin where Newfield Exploration is developing the Bakken. Newfield Exploration cited this cost inflation as one of the reasons the company increased its 2011 capital budget by $200 million, from $1.7 billion to $1.9 billion.

Despite the increase in costs in the Williston Basin, Newfield Exploration has not shifted its development activity to other basins as the company has increased operational efficiencies to a level high enough to keep returns competitive with the rest of its portfolio.

QEP Resources (NYSE:QEP) also saw service cost inflation during the most recent quarter, with the most inflation in pressure pumping and rig leasing rates. The company said that 1,500 horsepower land rigs were most in demand in the majority of the basins that it is developing. On the pressure pumping side, QEP Resources said that high demand led to a "lot of cost pressure" for these services, with the Bakken and the Cana Woodford Shale seeing the most cost pressure.

Like other operators, QEP tries to offset cost inflation with improvements in drilling efficiencies, and appeared to succeed in this strategy during the quarter. The company reported that average cost to drill and complete a well in the Haynesville Shale fell was $9.1 million in the first quarter of 2011, down from $9.3 million last year. (Oil and gas investments can provide unmatched deduction potential for accredited investors. For more, see Oil: A Big Investment With Big Tax Breaks.)

Providers
Baker Hughes (NYSE:BHI) confirmed much of this commentary after the company reported its earnings for the first quarter of 2011. The company reported that its pressure pumping capacity in North America was "sold out", and predicted a continuation of excess demand due to the rising service intensity of drilling in North America. Baker Hughes increased its estimate of the North American rig count in 2011, as it expects activity to increase throughout the year. The company expects the United States rig count to be in a range between 1,740 and 1,790, and the Canadian rig count to range from 340-390.

Schlumberger (NYSE:SLB) also made positive comments on pressure pumping capacity during its recent earnings conference call, with the company reporting record utilization in that business in March 2011. Oil service costs keep rising, as exploration and production companies crowd into the hottest onshore oil and gas basins in the United States. (Drill down into financial statements to tap into the right companies and let returns flow. For more, see Unearth Profits in Oil Exploration and Production.)

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