The cost of drilling for shale oil is falling for the first time in about two years as demand for equipment and workers falters.
Prices for key oilfield inputs such as steel pipe and fracking equipment are softening, according to executives at shale specialists such as Diamondback Energy Inc. and Marathon Oil Corp. The timing is problematic, however, after US crude prices posted their worst start to the year. since the lockdowns of early 2020, raised doubts about the wisdom of adding more oil supplies to global markets.
Part of the price relief for shale oil explorers has been driven by a deep depression in natural gas markets that is prompting companies to suspend or cancel drilling, freeing up rigs to migrate to crude projects more profitable
“It’s cost deflation,” Diamondback CEO Travis Stice said this week, citing a $25-per-foot drop in the cost of steel pipe as an example.
At the same time, oilfield service providers such as Halliburton Co. they are pushing back and pledging to use mothballed equipment rather than see their rates reduced. Halliburton and its fellow titan SLB have been among the worst-performing energy stocks this year in the S&P 500 index.
“This is the first real evidence that service companies have weathered this cycle,” J. David Anderson, an analyst at Barclays Capital Inc., said in a telephone interview. “Can service companies hold the line here?”
Executives at one of the most closely watched shale drillers, EOG Resources Inc., said inflationary pressures are easing. Costs should continue to deflate next year, President Billy Helms Jr. said Friday. during a conference call.
Even before the 11% drop in U.S. benchmark oil prices this year, shale drillers were exercising restraint in expanding production. Rewarding investors with dividend increases and share buybacks took precedence over production growth for the first time in the industry’s young life.
This has left oilfield service executives with the difficult choice of holding the line on pricing or discounting to retain customers and market share.
“The energy market in North America is in a state of flux, with conflicting views and outlooks among oilfield services companies,” Evercore analyst James West wrote in a note to clients. Some oilfield contractors are offering discounts to ensure their fleets stay busy “while others raise prices or hold prices steady.”
Helmerich & Payne Inc., the largest rig provider in the Permian Basin, is idling equipment instead of cutting rates.
Equipment leases account for about 15 percent of drilling a new well, so the rate cut doesn’t guarantee the equipment will be used, according to Helmerich CFO Mark Smith. Rather, price concessions are generally harmful to rig owners because they put downward pressure on rents at the time of contract renewal, he said.
“The price is so easy to give up and so hard to get back,” said Barclays’ Anderson.
