The DEP father/son research team just arrived in Midland where we will spend this week as young Trevor kicks off his first summer internship.  Let us know if you are open for a quick visit.  Importantly, we will host a small reception on Thursday evening.  You are welcome to stop by – we have a few open spots, so email me for details.  Next week, the team splits – half going to Denver and the other half to OKC.  We will update our event calendar in next Sunday’s note.

BKR U.S. Land Rig Count.  Flat at 442 rigs. Not much to report.

New Equipment Innovation Persists.  This week Allison Transmission announced the introduction of its FracTran transmission design.  We expect to see this equipment in person in the coming weeks, but based on the company’s announcement, the FracTran transmission will be launched with a rating of 3,300hp, but will be capable to operate up to 3,500hp.  Interestingly, the company believes the transmission will have a service life up to 25,000 hours.  We have historically assumed transmissions, in general, had a service life of ~10,000 to ~12,000 hours, so a potential doubling of life is noteworthy.   A number of other equipment design highlights were profiled in the product launch announcement, but we’ll dig into this more when we can see the unit in person.  That said, Allison’s innovation follows similar announcements as other large OEM’s, all of whom are continuing to invest in R&D to deliver better, more efficient products.  Many of these, which we have profiled, ultimately support the industry’s desire to reduce emissions and wellsite footprint as well as to reduce operating costs for the users of the equipment.

Well Service Update.  Time to update our latest views on a frequently overlooked sector.  The last DEP well service update was published in late November, but since that time, a few notable events have occurred, all discussed below.  Today, DEP finds itself more excited about this sector than any other despite the fact it is one of the least profitable and most oversupplied OFS segments. Persistent balance sheet stresses combined with the inability of many corporate boards to effect real change now create the right recipe to consolidate.  Moreover, higher oil prices are driving demand higher for production-related work.  This, coupled with an active drill-out market, create a demand backdrop supportive of higher rig rates.  Furthermore, the labor challenges, notably labor shortages, distill into virtually all our industry contacts having jobs on the board which can’t be addressed.  In other words, the cocktail is just right for an inflection in returns, but for this to occur, industry leadership must transition from today’s focus on market share to instead a focus on profitability.  In other words, rig hours do not equate to free cash flow.

U.S. Market Size.  The Energy Workforce and Technology Council (“EWTC”), which is the combination of the PESA and the AESC, tracks the U.S. well service market.  Per its most recent industry tally (March 2021), the association tallies ~2,512 well service rigs, of which ~923 are reported to be active – a 37% utilization rate.  The Daniel Energy Partners tally stands at 3,343 total rigs.  Both figures are wrong.  Here’s why.  First, we do not believe all companies report data to the ESTC.  Therefore, this will lead to an understated tally.  Second, for the DEP tally, we track at least eleven well service companies whom we believe exist, yet we have absolutely no idea how many rigs these companies own.  Moreover, the reality is there are likely scores of sub-3 rig “mom-and-pops” which exist but are players even our most frequent field tours have yet to uncover.  In other words, we strongly believe the actual count is higher, thus we guess the industry tally is somewhere near 3,500 rigs.  One large existing well service company who also tracks total rigs sees a higher total.  Given this company’s full-time job is well servicing, we would expect their data set to be better than ours.  Per our last discussion, this contact sees the U.S. rig count closer to ~4,000 rigs.

As for our tally of working rigs, it too is understated.  Here’s why.  We know many, but not all industry players.  Our relationships tend to be with the mid-to-larger contractors.  Most of those we know will share data confidentially with DEP; however, there are scores of privates with whom we have yet to develop a relationship.  That is not a result of DEP’s lack of outreach.  Nevertheless, we are unable to fully vet everyone’s individual rig and utilization metrics – hence our disclaimer.  This past week we were able to make contact with 23 well service contacts who collectively own approximately 2,146 rigs (out of a total DEP industry count of 3,343 rigs).  For this group, roughly 832 of the rigs are working, a utilization rate of ~39%.  Of the 832 working rigs, nearly 82 would be classified as 24-Hour packages, of which the majority of those would be tied to the completion market.

M&A is Evolving.  Still a bit elusive, but deals are beginning to take place.  Last year, we were pleased to see the BAS/CJ combination and frankly assumed the deal would open the door for a broader consolidation process.  That failed to materialize to the degree we had hoped for.  Recently, however, there are signs of life as Axis Energy Services recently bought the well service rig assets of Forbes Energy Services.  One down, but many more deals need to occur.  While we will not speculate on specific deal possibilities, we remind readers that balance sheet challenges facing the well service sector remain real.  In some cases, creditors have been equitized.  In other cases, companies may soon enter another restructuring process.  What we hear frequently from field contacts is an industry where many participants are often slow to pay and still pricing services to win work.  Not a good strategy.  Lastly, we also note the emergence of American Well Services, the buyer of the PXD well service fleet.  Time will tell if this new player will seek to increase its well service exposure, but we would suspect a modest customer diversification strategy would be a reasonable supposition.

Rig Contractor Perspectives:  The same message from virtually all contacts:

  1. Demand is improving with rig hours poised to rise in Q2/Q3.
  2. Pricing is beginning to recover but remains below pre-COVID levels.
  3. Labor can’t be found.  If more people would come back to work, more rigs could be deployed.
  4. Companies are turning down jobs due to the lack of crews, hence backlog exists.
  5. Despite the positive demand backdrop, few feel they can press the pricing accelerator yet.
  6. Consolidation is needed, but no one has cash to do deals.
  7. Many small companies are willing sellers, but will they take the paper of potential buyers?
  8. P&A excitement/interest growing, particularly if government provides grants to P&A old wells.


Rig Builder Perspectives:  Newbuild activity remains slow but percolating with two builders each citing low single-digit unit sales while a third did not quantify, thus we assume a negligible amount as well.  What is occurring, however, is a modest uptick in rebuild activity, including a rise in category 4 inspections.  One builder characterized its rebuild activity as nearly double the 2020 rate while another builder cited a similar y/y improvement on mast inspections.  Builders also point to a rise in field maintenance whereby builders deploy their personnel to perform maintenance work.  Purportedly, the builders have a higher cost for this service work, thus during recent market softness, rig contractors either opted for lower-priced maintenance service providers or simply didn’t do the work.

Inquiries for rigs is also on the rise, but not necessarily for new rigs.  There is a growing list of small rig contractors looking for good used rigs.  Others are electing to “upgrade” rigs and will sell old rigs to help finance the purchase of new equipment.  In fact, the used rig market remains active with significant inventory on the market.  Finally, our channel checks also reveal diminished manufacturing capacity as several legacy builder seemingly have exited the market – at least that’s the perspective from discussions with existing builders.  We have calls into a few other builders, so we’ll touch on this topic in greater detail in another note.

Electric Rig Inquiries.  Everything is electrification these days, but the inconvenient truth is the U.S. well service sector can’t afford to make the investment.  Nevertheless, rig builders report a rise in inquiries from large E&P companies regarding the availability and cost of electric well service rigs.  Inbounds from service providers exist but feel less tangible given insufficient financial resources.  Price quotes from builders to us vary and are largely conceptual at this point since no one is actively building electric rigs, at least not in scale.  Broadly speaking, builders see the cost in the $1.5M to $2.0M vicinity, a cost which excludes the power generation and support equipment.  This compares to a new conventional rig which would have a sticker price in the $800-$900k vicinity.  One rig builder sees an engine upgrade process as the natural near-term solution.  Purportedly, some companies are looking to swap old engines for new Tier 4 engines, a cheaper way to reduce emissions given the upgrade process likely falls in the $200k per engine range.

Industry Considerations.  Balance sheet and financial woes persist for the sector. There is a growing speculation about the outcome of select companies in financial distress.   Not the forum to name names, but here’s the discussion.  Demand for rig services is high.  Companies report growing backlog due to the inability to staff rigs.  This, coupled with $60+ WTI, gives legitimacy to rate increases.  To the extent an existing provider were forced to shut-down due to financial distress, the impact to the E&P end-user could be significant, particularly if the well service company in question is one of size.  Therefore, industry players contend E&P companies should assess their well service procurement strategy in the event creditors make decisions which create operational disruptions.  By the way, we chatted today with a non-well service player whose company is shutting down purportedly due to difficult creditors, thus our postulating is not without reason.

Permian Basin BBQ Cook-Off.   We recently sent out the sponsorship brochure for the 4th Annual Permian Basin BBQ Cook-Off which will be held on September 30th.  We will circulate next week the registration link to subscribers/sponsors.  Cooking teams should receive cooking rules/etc. in early July.  Please save the date and if you would like to support this event, please let us know.  All support would be appreciated and we apologize in advance for what could be a looming bombardment of BBQ related emails.  Cooking teams – remember to let us know which charity you are competing for.  Thanks.


Daniel Energy Partners is pleased to announce the publication of its first market research note. In this note, we reached out to executives across the oil service and E&P sectors to gauge leading edge sentiment.

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