In Well Completion Work, “Turnkey” Isn’t Always the Answer
Today’s oilfield, with its super-competitive service sector, calls for new strategies. For some, it’s a fight for survival. For everyone, there is the need to hold one’s own against a rising sentiment of winner-take-all. We examine these and other signs of our times. Plus, we share a Q&A with Kelly Connally and Matt Hargett of Integrity Wireline.
The onshore, upstream oil and gas industry is at a crossroads. Where it goes from here will set the course for years, if not a decade or more.
As 2019 draws to a close and 2020 rises in our sights, with crude still trading at less-than-favorable rates, the talk in the oilfield is consolidation. Analysts say that the sluggishness in crude prices could persist well into 2020, and that could give rise to yet more mergers and acquisitions. In challenging times, weaker companies become vulnerable, and stronger, bigger entities can be quick to snap them up.
That’s a prospect that favors the giants. In recent years, the major oil companies have come back home to domestic oil fields, especially to the biggest of them all, the Permian Basin of West Texas and Southeast New Mexico. The majors have acquired vast tracts of leasehold in the region, and have brought with them a “manufacturing” mentality, where production is concerned. Everything gets done on a grander scale.
Changes for Oilfield Service Companies
For oilfield service companies, that has meant changes. The earliest beneficiaries of this change have been the giants of oilfield services. Historically, major oil companies have hired major oilfield service companies (companies like Schlumberger, Baker Hughes, and the like) to perform their production work, and even much of their exploration work. It’s understandable: big companies like to do business with big companies, because they match up in size, in reach, and in versatility.
All things being equal, that’s not a bad thing, necessarily. But in tight-market times like we are seeing today, it can bring some undesirable fallout. That’s because merger-and-acquisition activity shrinks the number of players in the field. Consolidation means fewer service companies to choose from. And when there are fewer to choose from, operators have fewer options. If service prices go higher—and they will, when the field shrinks—operators will see their profit margins shrink. The “bigs” sweep the field, and the industry is poorer for it.
What happens is that the “generalist” service firms buy up the “specialist” firms. The giant oil service companies are the generalists—they do every job that an oil well operator could want. The specialists are the niche companies. These companies generally do just one thing, but they do it expertly.
If you are one of these independent service companies,
we offer hope—and a recommendation—for you.
The Downside of Service Sector M&A
A company like Schlumberger typically will do a wide menu of services, including, say, hydraulic fracturing, water transfer, perforating, wireline, acidizing, pressure control, logging, and other jobs. But there are also smaller service companies that specialize in each of these functions. They, too, are available for the job. They’re good at what they do. But they have to keep getting work if they’re to stay in the field.
The major service companies, when they buy up these smaller entities, often just absorb that business’s client base and turn the work over to their existing crews. Sometimes the smaller company’s expertise gets cast off, because the big service company already has a full staff and a full fleet.
So the process leads to less diversity in the service sector. When the generalist firms buy up the specialist firms, that’s when the marketplace ends up with too few players.
It doesn’t have to be that way. The oilfield doesn’t have to make these boom-and-bust swings, when consolidation transforms the landscape, only to be followed by ever-higher prices that then give rise, years later, to new crops of start-ups, and the whole cycle begins anew. No, stability can prevail if smaller service companies can keep themselves in the game. With more service companies in the mix, operators get more choices, and prices stay more favorable as well.
The latest threat to the smaller independent service companies—the “niche” companies—is the effect of “bundling” of services, as offered by the giant corporations.
These huge service companies often tell an operator that a bundled, turnkey package is what’s needed today. This is another way they pose a threat to the survival of smaller service operations. When smaller, specialized companies cannot maintain a foothold—being squeezed out because they are not part of the “bundle”—they lose clientele. And they can become acquisition fodder for the big boys.
But there is a path of survival, and two wireline company leaders share that path. Read on for our Q&A with Kelly Connally and Matt Hargett, both of Integrity Wireline. Connally is CEO and Hargett is Director of Operations.
Hiring Vendors in O&G’s New Marketplace: A Q&A with Two Pros
Interviewer: Matt, why should the operator of a well consider hiring multiple service providers—more than just one contractor—and not do a package deal?
Hargett: I can understand the appeal of a packaged, “bundled” deal. As I look at it from the operator’s side of things, with operators doing what they do for cost-effective reasons, I understand their reasoning. It is what it is. But my response to that is, if you’re getting a discount on something, you’re probably going to get a discount on service quality, too. If they’re giving you something for “free” (sometimes a frac company says that the wireline portion they provide is thrown in for “free”), their focus is going to be on just the bigger part of the package deal. Which, more often than not, is going to be the frac side of it.
To me, that (the frac part) is just the bigger side of it. It’s no different from any other situation when you buy anything that’s more expensive. More often than not, you’re going to have good quality and good customer service, and all of that. And (conversely) if you buy something that’s cheaper (and a wireline job that is “thrown into” the bundle as a free bonus is something that’s definitely “cheaper” than if it was transacted at its real cost), your quality and your customer service are likely going to be less.
In my opinion, nothing’s free. In some form or fashion, you’re going to pay for everything you receive. It’s just that those costs might not be itemized on your bill as “wireline.” But they’re accounted for in there somewhere.
Interviewer: Kelly, what advantage can your company offer, as a specialist and an independent?
Connally: It’s important to be your own entity out in the field. We want our name to stand out. Also, we have all the new innovations and we run our own pressure control on our jobs. We want people to know that we have the full capability of going in solely as a wireline crew—not bundled in (for one overall price) with a frac crew or a pumpdown crew.
I like it as an independent because you stand alone out there. You know, you do work as a team with that frac crew, but you actually do stand alone as far as who you are out there. Your service quality stands alone, if you aren’t “bundled in” with other services as part of a frac package.
But if you’re all tied together, in a bundled offering, the efficiency, as anyone knows, can go bad for both of them—wireline and frac both.
Interviewer: Matt, when the service contracts and arrangements are decided, the frac’ing part is dominant, right? And aren’t the frac companies generally bigger than the water transfer companies, or the wireline companies, or the sand provider, and so on?
Hargett: Yes, exactly. On these jobs, everyone knows it’s a frac job. Plain and simple. Frac is Number One out there. It’s not called a wireline job. It’s a frac job. And so when you get one of these big oilfield service companies out there, their emphasis is all on the frac part. That’s where they’re invested the most. Not in the wireline aspects. But where we are concerned—we’re out there to do just our job, and that’s wireline. We’re not out there to do frac. When wireline is all you do, you have to be experts in it, and you are experts in it.
Interviewer: What can an operator expect from a service provider, if that provider is not the “complete package”?
Hargett: As for hiring an independent wireline contractor, well, to me, getting an independent means getting more personal service. When you hire us to do wireline, we’re going to do wireline. That’s all that our company does. Whereas, if you hire a company that bundles its services, including the wireline portion, then you’re contracted all at once for those multiple services. We offer one thing. That’s what we do, and we’re going to give you the best service available. We do our job and you hold us up to a standard as to what we do. And we’re accountable to that standard. If we have problems, they’re our problems.
So it’s a matter of accountability. And that also has to apply to the big service companies who bundle services. Whenever a provider bundles so many services, the operator is going through just one vendor, just one person, and that one person might not be as accountable where, say, the wireline portion is considered. But if it’s us out there, and we don’t have to answer for frac or water transfer or pumpdown services—if something happens and it’s our fault, then we are going to make good on that problem. Not only that, but the operator knows that as well—he knows who he can count on to make good on things. But if the operator is having to hold a big oilfield service company accountable for something that went wrong in just the wireline part, well, that can be a bigger deal. It’s harder to take some of those big companies to task—they’re huge.
That’s why some operators don’t go the “bundling” route. It’s an accountability issue.
Interviewer: Kelly, what advice do you have for other companies who are specialists but who aren’t giant corporations? How can they compete?
Connally: Wireline companies aren’t the only ones that are being affected by this bundling trend. Any company that does a job that is associated with well completions—but that isn’t a large oilfield services firm—can feel the impact. But there is a way we can help each other that will be good for each of us.
Recently, I went to Wichita Falls, where I talked to a frac company there. This company does fracs but they don’t do every job on a well completion. They don’t do the wireline portion, for instance. We decided that we are going to sell them, and they are going to sell us. We’ll still each be separate, but we will recommend each other for the work. This sort of thing is starting to happen with the specialist companies. They’re teaming up. What they’ll do is, one company, let’s say it’s the frac company, will go to an operator and, if they win the bid on the frac, they’ll say, “We can save you some time on getting a wireline company. We’ve already got one. And they’re really good.”
So, a lot of companies are doing this now. And that’s what we’ve been doing as well. The week after I met with that frac company, I met with another one. This other one does some different kinds of jobs than the first one. The Wichita Falls company does more vertical well work. They do a lot of the Spraberry wells, for instance. This second company does low pressure horizontal wells, like you find in the area of Big Spring, Stanton, and Merchant. But the two meetings went very well, and we’re teaming up with both of them. A lot of frac companies are teaming up with wireline, and it makes it easier for you to get into talks with the oilmen.
You’ve got to figure out how to beat the system of the bigger players. As I said, this is starting to take hold.
Interviewer: Any other thoughts?
Connally: One other area where the bigger players are somewhat vulnerable is this: the service quality has gone downhill. That’s true among some of the biggest companies, and it’s true among some of the smaller companies too. There are always companies where the service level is not as good.
Until lately, that situation has made some of the frac companies—the ones who do fracs only, or mostly just fracs—scared to team up with someone else. Because you don’t want to get yourself associated with a wireline company out there that might not be up to your standards, and might hurt you with a customer with whom you have had a relationship for years. So, that has held some frac companies back. But these two frac companies I’ve spoken with, both of them know what our company is about. They know our safety record. They know we’ve always maintained a good service quality. We’re proven. That’s what it takes to form these partnerships. You’ve got to have the good reputation.