Hanging Tough in the Oilfield Services Sector? You Can Survive If You Keep Your Focus
Two leaders at a small-to-mid-sized independent service company discuss the current challenging marketplace and their own strategies for success.
It’s all kind of simple, really. The companies that stick around, the companies that thrive, are the ones that stick to business and mind the basics.
That’s true in any business cycle. Even in this late-year dip that the oil patch has seen. This downturn is affecting everybody, but service companies seem to be the first to feel it and the last to climb out of it. For them, finding a strategy that gets them through this rough patch can be the difference between prevailing and perishing.
“We’ve seen quite a few wireline companies, five or six companies out in the Permian Basin, companies like us, that are gone now.” So says Kelly Connally, CEO of Integrity Wireline, a good example of a services sector business that has stayed busy and held onto market share.
Changes for Oilfield Service Companies
“The thing about getting jobs [work], whether it’s us [management] doing it or a salesman in the field, the key is staying in contact with your prospects and being able to present them with solid information about your company,” Connally said. “Efficiency reports are important. And being honest on what your experience has been as far as your crews are concerned, and your engineers, and all your hands. A lot of that plays a big factor in whether or not the big companies decide they want you to come out and work for them. You don’t want somebody—an engineer, for instance, who has only three or four months’ experience—to be assigned out there to perform on a horizontal well that’s a two-mile lateral.”
Wireline companies are in the same boat as other service providers. Well control, well treating, mudlogging, chemical treating, water transfer, environmental service—any kind of trade—has to ride out the shakeouts that come when the exploration and production (E&P) companies retreat or retrench. These days, Wall Street and private equity have tightened the purse strings, where oil activity is concerned, and the price of crude and of natural gas—currently stagnated at modest levels—hasn’t helped the situation any.
The Rig Count is Down
The rig count is down. Oddly, though, that doesn’t mean what it always used to mean. In decades past, a diminished rig count generally meant diminished well completion activity all around. But today, with so many DUCs (Drilled but UnCompleted wells) sitting available, there doesn’t have to be drilling activity for there to be well completion activity. The inventory of DUCs numbers in the thousands of wellbores. It just takes a go-ahead to turn on the tap.
So why don’t they? It comes back to that lack of investment capital, and that unfavorable pricing for crude oil.
The Big Picture
U.S. shale production is slowing down, according to a Nov. 6 report from IHS Markit, a leader in information and analytics. The IHS Markit outlook is for U.S. production growth to be 440,000 barrels per day in 2020 before essentially flattening out in 2021. Modest growth is expected to resume in 2022, according to Raoul LeBlanc, vice president for North American uncoventionals at IHS.
“Going from nearly 2 million barrels per day annual growth in 2018… to essentially no growth by 2021 makes it pretty clear that this is a new era of moderation,” said LeBlanc.
Nevertheless, the industry retains the ability to still grow rapidly under the right conditions, the report says. “There is certainly ample inventory of high-quality wells out there,” LeBlanc said.
Meanwhile, Enverus, a leading oil and gas data analytics company, observed in October that investors would like to see consolidation in the oil patch. That’s an answer many prescribe for the sluggishness that currently prevails. Reduce the number of players via mergers and acquisitions, gain efficiencies from scaling up, and thereby improve cash flow. That’s the mantra. But, as IHS observed, the low price of crude exerts a dampening effect.
Here’s Enverus’s assessment:
“Moving into the final quarter of 2019, public companies are likely to remain highly focused on keeping capital expenditures in check while maintaining moderate production growth to deliver on promised free cash flow.”
How the Services Sector Gets Hurt
So this market is seeing a reduction not just in drilling but in completions as well. That translates into diminished activity for the services sector. And the services sector doesn’t make any money when they’re idled. A producer could be making money from the continuing flow of oil from past wells. But service providers don’t own any minerals, and if they’re not busy with field work, they’re not generating revenue of any kind.
The services sector doesn’t get as much attention from media and from statisticians as the E&Ps get, but the services sector is huge, regardless.
That brings us to Integrity Wireline and its own recipe for staying in the game and being competitive.
According to CEO Connally, they’re banking on customers recognizing them as a good, high quality company that is strong and service-minded. So far, it’s working.
Connally arrived at Integrity Wireline three years ago as part of a new management team that was brought in by investors to turn the company around. At the time, Integrity was more of a well servicing company, doing workovers and typical well service, deploying “yellow iron,” and doing a broader variety of jobs than they currently do. Connally rose to CEO shortly thereafter, and meanwhile the company has shifted its focus to where it lies today: entirely in wireline activity. They perform the usual array of services that any wireline company offers, but their stock-in-trade is well completion work. On a hydraulic fracturing job, Integrity supplies a crew that performs the pumpdown stage work. “Stage work” refers to frac stages. They deploy the downhole tools that set the plugs and perforate the casing, in advance of the pressure pumping job that is to follow, during each stage of the fracturing process.
In the Permian Basin
Their main field of activity is the Permian Basin, and their customers are mostly the major oil companies and the big independents. These oil companies employ a large array of service providers of all types, and for any of those providers, holding onto one’s share of the work requires professionalism, especially in a market that has seen a slowdown.
Alex Richter, at EOG Resources, offers a view that is likely shared by all successful operators in the Permian: “In this industry, you’ve gotta be priced right and you’ve gotta have a good safety record and you’ve gotta do a good job. We keep up with what kind of efficiencies and mis-runs you have.”
Integrity Wireline has worked for EOG for years. Connally, at Integrity, insists that consistency means everything.
“Our number one key, when we started this as a management team, is that we were out to build a good quality service company,” he says. “And we have. In the long run, we believe in what we’re doing. Regardless of whether it hurts you or not, you’ve got to maintain good service and have good people and good managers. When you do, it’s going to go a long ways for you.”
Connally said Integrity is not the most expensive option for operators to consider, but they are not the cheapest, either. Like other wireline companies doing stage work, they charge by the stage.
“And if our price proves to be $300 or $400 more per stage than the lowest bidder, we hope people will recognize that we are more than worth the price because we will go out there and be more efficient,” he says. “We’re making more stages, and our safety is still really great. If a customer is willing to pay that $300 or $400 more per stage, we’ll prove to them that we are on the top of our game as far as equipment quality, hands, and the ability to complete that job successfully and in a timely manner. We’re finding right now in this industry that a lot of the operators are looking at price right now. But I do think it will get back to quality. So we’re not going to lower our standards. We’re going to stay right where we’re at and I think that will pay off in the end.”
Each new opportunity provides another chance to build a relationship, according to Integrity’s director of operations, Matt Hargett.
“When you get the opportunity to get on a [well] location, you’ve just got to be able to perform,” Hargett said. “If you do, then more than likely you’re going to go to the next one. But if you go up there and just have problem after problem, then, even if you finish that well, you’re probably not getting called back. And so that’s where we try, where people and equipment are concerned, to just take the best that we’ve got and put them out there.”
Connally described a typical new assignment.
“Each step in the process is itself a job that has to be perfected,” he said. “Anything from getting the procedures [from the operator], to getting them to the [perforating] gun builders, to getting the gun builders to build it, to having the safety guy take care of his stuff, to perparing the engineer and the crew on what they’re going to be doing—it all requires great care. Including having our equipment/operations manager get our equipment into shape before sending it out. The business of getting everything prepped falls on us at the home office. Once we get it out there, from there it’s all up to our guys [in the field].”
But every day the field hands send reports back to the headquarters.
“We know exactly what’s going on,” Connally says. “We have our best field supervisors out there all the time—they’re amongst our guys. Honestly, we just have a great group of guys. I stand by these guys 100 percent of the time. Just look at our track record—we’ve been with EOG Resources for going on four years. We’ve been with XTO Energy for almost a year. So that reflects on us as a company. It shows the consistency and success they’ve had with the customers we work for. Our guys love that—they do not like jumping around from customer to customer. So that makes them strive even harder to make it work out there so we can maintain a solidarity with these customers. That’s big for us.”
Connally said that all service companies are seeing rough times in the oilfield right now.
“But it’s going through times like this, when there is lots of price-cutting among your competitors and some companies are trying to undercut you—it’s times like this that you bear down and just hold onto your place. You do what it takes to not downsize and not get squeezed out.”
But there’s something else that goes on, meanwhile, that fortifies a company from within.
“It’s times like this, really, when you find out who you have who really wants to be here,” Connally said. “You can really build a core group from those steady, loyal employees. It’s like [Integrity’s human resource manager Bubba Poe] says: ‘Normally it’s a problem that takes care of itself—it takes some people leaving, some people jumping for other offers, even for just a small difference in pay—it takes that to get down to your core group.’ The ones who leave during those times—those turn out to be the ones we didn’t need.”
Connally said the company has always been very good to its employees. “I want them to know that, hey, even though the times are difficult, we’re still making money. We’re just careful of how we spend what we get. We’re doing fine. At our last board meeting our board was perfectly happy.”
“We know our guys. We know their wives’ names.
We know their kids’ names.” —Hargett
Hargett said that an important quality is having workers who love to work for the company they’re in.
“This company doesn’t run the way it does because of us [managers],” Hargett said. “It runs because of the way those guys out in the field perform. They’re out there making wireline runs while being away from their families two weeks at a stretch. Those are the guys who make this company what it is. If you have workers who don’t care about the company, and don’t care about what they’re doing, you’re probably going to fail. The group of guys we have working here, they’re here because they like working here. We go out of our way to take care of our guys. We know their wives’ names. We know their kids’ names. We know where they’re from. We know what grades their kids are in. We know about their families. That goes a long way with them.”
Adds Connally: “They’re not just numbers. They’re people. You take care of your hands, they take care of you.”
And then, too, just plain straightforwardness means something, still. Even in the new-era oilfield, old school values still matter.
“A handshake means something to us, still,” Connally said. “Because I promise you, when we shake someone’s hand, we’re being honest—we’ll never lie to them or anyone. And that kind of attitude will win in the end. It’s already worked a lot in our favor. There are companies out there, companies that were our size, that are gone now. They shut down. But we’ve survived and we’re going to continue to survive.”