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Gas Price Impacts Moving to Liquids Basins, Says Schlumberger

April 30, 2012
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Hydraulic fracturing (fracking) services under pressure in North America's natural gas basins are beginning to see many of the same impacts in the liquids-rich basins, Schlumberger Ltd.'s CEO said earlier this month.

Paal Kibsgaard spoke with energy analysts during a conference call to discuss the oilfield service company's performance in the first quarter. The company had signaled late last year that frack pricing in the U.S. and Canadian gas basins was taking some heat. Producers last year began moving to liquids-rich basins from gassy targets, but pricing issues are following them, said the CEO.

"So far, the pricing impact varies by basin as excess capacity is moved around, but we expect to see lower pricing reaching all basins in the coming quarters," Kibsgaard said. "In addition, the continued movement of rigs and frack capacity adds costs and lowers utilization, which together with the pricing impact, puts pressure on margins."

North American onshore service operators are facing "two main uncertainties going forward," he said.

"The first one is the outlook for gas rig activity. Now with the record storage levels and natural gas pricing below $2.00, the drop in gas rig activities have to continue down from the current levels in the low 600 [rig count]. How low [is it] going to go? It is unclear at this stage. As the activity flow is supported by the lease commitment actually not that significant.

"Now on the other hand, the other main uncertainty is pressure pumping margins, which are under attack from several fronts. First, utilization is likely to remain challenged because the lower well inventory leaves the frack fleets chasing the rigs much, much more than what we used to do six or 12 months ago. If you look at the bid pricing, it continued to drop in both gas and liquids during the quarter. On average, toward the end of the quarter in gas, we were bidding about 20% down sequentially and, in liquids, about 10% down sequentially on average between the liquids basins."

Other oilfield service operators have reported similar pressure pumping issues (see related stories).

During the first three months of this year, new pricing began to "significantly" impact margins in the gas basins and some of the liquids basins "while the rest of the liquids basins I see being the coming quarters." In the liquids basins, "there are more frack stages per well, but the horsepower required per stage is lower because we pump at lower pressures and lower rates. So while you need the fleet in liquids, you actually need fewer pumps or less horsepower -- or actually fewer pumps per fleet and less horsepower per fleet in the liquids, which again is going to contribute to the oversupply of horsepower.

"So if you add to these factors the fact that there is significant horsepower and order for the industry, we believe there is considerable uncertainty around the outlook for pressure pumping pricing and the margin. So the fact that it's coming down in 2Q2012 I think is a given. And I think there's also significant uncertainty around the second half [of the year], and it might come down further in the second half."

Schlumberger has less exposure to pressure pumping than some of its competitors, including Halliburton Co., and its other onshore businesses should mitigate the issues around pricing, said Kibsgaard.

The service company has gotten a leg up in the unconventional fields through new technology, including land seismic. In March subsidiary WesternGeco created a new division to sell and lease the UniQ seismic imaging technology to other service companies and to energy companies that maintain their own crews.

Additional onshore technology introduced in the first three months of this year included MicroScope high-resolution resistivity and imaging services to estimate reserves, place horizontal wells and optimize completion design. It also launched Pathfinder iPZIG imaging services to optimize well placement in target zones, primarily for unconventional oil and gas markets. The service has been field tested in coalbed methane, as well as shale plays in North America and Australia.

In Schlumberger's production group, the company continues to see solid growth for HiWAY, its popular onshore flow-channel fracking system. Operations were conducted for more than 45 clients in 1Q2012 "with the number of fracturing stages growing by more than 25% sequentially," Kibsgaard said. HiWAY's business model has been expanded and now provides job engineering and monitoring, proponent chemicals as well as blending services, while the hydraulic horsepower, which often makes up two-thirds of the well-side capital expenditures, is provided by a third party. About 70 HiWAY stages were pumped using the blended model during 1Q2012.

"In North America, the transition from gas to liquids-based activity will continue in the coming quarter, and the outlook for dry gas drilling activity remains uncertain," said Kibsgaard. "We still expect U.S. land rig activity to be in line with 4Q2011 levels, provided the ongoing drop in gas rig activity continues to be offset by increasing activity in the liquids-rich basins. The other main uncertainty in North America is the evolution of pressure pumping pricing, which based on the ongoing transition, is set to continue down in the coming quarter. Still, our well-balanced service portfolio on land and our strong leverage toward the Gulf of Mexico puts us in a good position to outperform in the North America market going forward."

Many financial analysts believe that rig counts drive the financial performance -- and therefore the stock prices -- of oil services companies, and recent data seem to bear that out. For the last three years, changes in the U.S. weekly rig count has explained 49% of the variability of the Philadelphia Oil Service Sector Index (OSX), which is comprised of 15 publicly traded oil service providers. Interestingly, the fate of the OSX recently has been far more correlated to oil drilling than gas rig activity. Since April 2009, movements in the U.S. oil rig count have explained 54.3% of the variability in the OSX, versus just 4.2% for gas rigs over that time period.

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