Expert Q&A: RigUp sits down with WoodMac’s R.T. Dukes

Where do we go from here?

As we progress through a volatile 2Q, we’re sitting down with one of the most well regarded E&P analysts on Wall Street to discuss the state of the North American upstream industry.

RT Dukes Image

RigUp: M&A in the Permian Basin remains a hot topic. This quarter we’re starting to see majors or larger E&Ps like Exxon and Marathon making sizable acquisitions in West Texas. Is this a signal that the consolidation is coming to an end? What do you expect in terms of M&A in 2Q 2017, particularly as it relates to the Permian Basin?

R.T. Dukes: There will be more, but there aren’t a host of companies looking to exit like there were 18 months ago. We’ll continue to see deals, but the next wave of consolidation will happen over a longer period and will be when economies of scale begin to matter. Add up guidance from many of the top operators, and it might be sooner than we think.

RigUp: Wall Street has dramatically increased Capex estimates for the back half of 2017 and into 2018. Based on your basin by basin analysis, is North America going to exceed production expectations for the year and if so, is that bearish for the commodity markets?

R.T. Dukes: That’s dependent on your expectations! With that, we’re on track to surpass the 2015 peak in oil production near the end of 2018. I suspect that probably outpaces what most people thought would happen. Of course, that could all change to be lower or higher if prices decide to settle closer to $40 or $60.

RigUp: Are we in a world now that should be focused on the “Call on Permian” instead of the “Call on OPEC”? Or is that still wishful thinking and posturing?

R.T. Dukes: The Permian is a significant player on the global stage, but it’s not big enough to single handedly suppress prices for a long time. It will create problems in years that demand growth slips or when global supply outperforms. That will cause year to year problems, but in the long-term, it’s not the sole price setter.

RigUp: Given the strength in production growth in West Texas, there’s some scuttlebutt that we’ll run into takeaway capacity issues starting later this year. What are your thoughts?

R.T. Dukes: We definitely could, but the pipes are on the way. We don’t expect any prolonged blowout in prices due to takeaway capacity. The problems are intra-regional and on the other side of those long haul pipes. Many of the major producers plan to produce so much they need to think about who their buyers are and securing demand for their production.

RigUp: Shifting conversation about takeaway capacity to the Northeast, what are your thoughts on basis differentials in the Northeast? How big of an impact is Rover Phase 1 going to have on the market? Do E&Ps adopt an even more aggressive productive behavior thereafter?

R.T. Dukes: It’s not just Rover, but the other pipes that will add Northeast connectivity too. Add all the projects together and the region looks set to have excess capacity for a few years post 2018. As a result, producers are going to realize prices that are much better than what they’ve seen in recent history.

RigUp: For the last 6 months, the industry has been talking about “core natural gas wells” having been drilled and completed already. What’s your opinion there?

R.T. Dukes: We’ve seen high grading to the highest degree over the past couple of years with oil and gas prices seeing cyclical lows. That is changing on the oil side as operators are already stepping out, but there’s still a big inventory of core natural gas wells that have yet to be drilled. Above $3 natural gas, we’ll see more drilling outside of just the Marcellus and Haynesville.

RigUp: RigUp’s marketplace has seen the market visibly tighten for frac for 1Q this year. In some cases, based on geographical and technical requirements, there’s no spot availability until June 2017. What’s your perspective on the medium-term and long-term supply / demand for frac horsepower in North America?

R.T. Dukes: Costs are going up! The jobs are bigger, and we’re going to need more HHP than we had in 2014. Barring a price shock to the downside, we’ve probably seen the lows in completion costs and the name of the game is back to managing those costs. The industry seems to underestimate how big those swings can be, and we’ll need new horsepower sooner than most believe.

RigUp: Could you go into further detail concerning completion design strategies that E&P companies are deploying currently?

R.T. Dukes: Bigger has been better, but we’re starting to see that normalize. We’ve seen diminishing returns in certain areas as operators use more than 1,500-2,000 pounds of proppant per foot. While proppant and completion prices were low, operators had the luxury of pushing the limits. Now that costs are going up, we expect we’ll hear talk of more efficient completions utilizing the right amount of proppant, water, horsepower, etc.

RigUp: Specific to oil and gas technology, what’s the current state of the industry and their willingness to modernize? At RigUp, we’ve been blessed with a strong contingent of supportive and transformational companies that have championed our adoption. But at the same token, we’ve been told by certain operators that the internet just won’t work in oil and gas. What’s your take? Will the technology adopters win?

R.T. Dukes: I’ve seen it my entire career covering oil and gas: “If it ain’t broke, don’t fix it.” We’ll always have companies like that as long as they can capture reasonable margins, but we’re not in a world where anyone expects $5 natural gas or $100 oil. The potential margin just isn’t as big as it was. A lot of people believe we’ve already cracked the code, and everything here will be small gains. The problem with not worrying about small gains today is they add up to big savings over time. Technology is as important as ever, and I suspect those companies that are avoiding tech are much more likely to be the next casualties of the shale revolution.

To learn more about Wood Mackenzie, visit woodmac.com.

To sign up for a RigUp account for free, visit rigup.com.

Wall Street Journal: Shale’s Silicon Valley Boost

Manhattan Institute Senior Fellow Mark Mills speaks with Mary Kissel of the Wall Street Journal on how tech companies like RigUp are driving the next wave of U.S. oil production.

Mark predicted a ‘Shale 2.0’ in January 2016 in his article, “After the Carnage, Shale will Rise Again.

“Silicon Valley is going to revolutionize the oil industry in the same way that it’s revolutionized other industries,” notes Kissel.

When Kissel asks Mills to name companies that are playing a big part of the revolution, Mark refers to RigUp as the AirBnB of the oil and gas industry.

Learn more and watch the full interview below.

Wall Street Journal’s Opinion Journal: Shale’s Silicon Valley Boost

10 Predictions in Oilfield Services for 2017 – An interview with Infill Thinking’s Joseph Triepke

As 2017 gets off to a start, RigUp is sitting down with some of our industry’s most respected experts to share their insight, thoughts, and wisdom as we exit a tumultuous downturn in the commodity markets. Our conversation today with oilfield service veteran Joseph Triepke should provide some insight into how we prepare for the recovery and what to expect in oilfield services this year.


Joseph Triepke, Infill ThinkingJoseph Triepke
is the founder & principal research analyst of InfillThinking.com, an independent oil and gas business research firm. For approximately a decade, Joseph analyzed the oil service and drilling industry for large Wall Street institutions. In 2016, he launched a new industry facing market research firm: Infill Thinking. The firm provides clear updates to oilfield decision makers, exposing new angles on stories and trends that really matter.


Q: After the dust has settled it seems like everyone is ready and anxious for the race back up. The balance seems to be rising service pricing balanced against equipment reactivations and supply reintroductions to the market, what are your thoughts?

A: As far as I’m concerned, your read on the market is spot on. The service space is chomping at the bit, eager to feast after several years of famine. During Q1 2017, we are looking for market share leaders in virtually every segment to push pricing higher. Reactivations are coming, but we may be in a sweet spot for service pricing improvement to start the year as prices are still generally too low to justify large scale reactivations. That could change after a few rounds of re-pricing.

Q: If pricing power returns as you expect, where do you think we start to see the inflection first?

A: Prices will likely first start to inflate across the completions supply chain, starting with pressure pumping. In fact, frac pricing started to inch up during Q4 2016. Double digit increases in frac pricing will be commonplace early this year as calendars are filling up for available spreads. Drilling rig day rates are another area to watch for inflation. The land rig market as a whole remains grossly oversupplied, but the higher end of the market is much tighter than the weekly rig count suggests. For example, super spec rig utilization is tracking above 80% industry wide. Historically this is the utilization level where pricing power returns to contractors.

Q: Since the fall, there’s been a lot of discussion and anxiety over potential future sand constraints (and in some cases, fears that sand constraints could actually limit US supply). From the conversations you’re having with pressure pumping providers and service companies, what’s the outlook on frac sand?

A: At this point, no one we talk with is concerned with frac sand supply in the Lower 48. By that we mean sand is plentiful at the basin level in the biggest plays. Consumption is tracking at about half of 2014 peak levels. We talked to the largest pumper of sand in late December and were told that water supply (while nothing to panic over) is more of a challenge than sand supply. What’s more concerning to us is potential bottlenecks in last mile logistics, meaning proppant delivery from transload facilities to well sites. This is where we see a potential choke point worth monitoring early this year.

Q: Any other gating factors or potential bottlenecks we should be on the lookout for?

A: I’m keeping an eye on labor. The highest quality workers have been or are being called back. The further down the call lists contractors move, the more issues you might have. And you could start to see wage pressure too, starting this quarter in particularly active basins like the Permian. With tens of thousands of workers returning to O&G, we’ll soon start to see just how many of the downturn’s casualties have permanently left the industry.

Q: The theme of “decoupling” services and flattening the multi-level supply chain emerged in the last commodity upcycle and the E&Ps that were early to that theme benefitted in the last downcycle – it also happens to be one of the key value propositions of RigUp – what are your thoughts on this theme as the industry goes back to work in 2017?

A: Taking costs out of the system structurally rather than cyclically is more important than ever. So too is finding structural efficiencies. The Lower 48 D&C activity recovery at oil prices half of prior highs has been impressive. To us, it underscores the critical importance of permanent cost savings. As service pricing reflates, we can’t lose efficiencies or this recovery won’t last long. I think that’s where new solutions like RigUp come into play. The recent downturn catalyzed the adoption of new methods. The coming upturn will institutionalize these new methods.

Q: Everyone is predicting a flood of E&P M&A (led by the strength of Permian Basin takeouts), what are your thoughts on OFS M&A as we head into 2017? Are there more interesting deals that could ensue following the GE/Baker Hughes & CSL/BJ Services announcements late 2016?

A: There’s not as much consensus about a wave of OFS M&A as in E&P because of valuation arguments. But I think deal flow could surprise to the upside this year, due in part by an intense focus on adaptive technology by the leading players, similar to the GE/Baker deal you mentioned. As far as specific deals go, we recently identified four likely OFS buyers in a note to Infill Thinking subscribers.

Q: Given the valuation challenges, how do you see these deals getting done?

A: Look for companies to use their equity as valuation equalizing currency similar to what Patterson-UTI did in the Seventy-Seven Energy deal late last year. We could also see buyers chase more attractive values in the privately held space. As earnings visibility emerges and estimates are revised higher, valuation concerns could start to fade. My sense is bid/asks are closing in this early stage of the upturn, and we could see some significant deals signed soon.

Q: You mentioned technology as a driver of M&A. What themes are you seeing for innovation on the service side?

A: Brute force factors of unconventional development like lateral length, stage counts, and proppant volumes are beginning to test diminishing return boundaries. As this plays out, we see a big push toward gaining sub-surface clarity so that brute force factors can be harnessed more effectively. This is a focus point right now for OFS technologists. The industry still does not understand the complexity of nano-darcy rock, but innovators are working on advanced science to gain visibility and design around the complexities of unconventional formations.

Q: Do you have a prediction on the US rig count this year? There’s been lots of talk about a lower ceiling given efficiencies, do you subscribe to that view?

A: I do. I believe the rig count will be hard pressed to achieve prior cyclical highs. Same concept as the 1980s – we simply need fewer rigs going forward to unlock production. So far everyone’s been surprised by the strength in drilling activity. Before the OPEC meeting, I had forecast 2017 would close with about 815 rigs working. When I made that prediction, there were about 563 US land rigs working, and today we are already up to 640. I still think we finish the year under 1,000, but we could run up a little over 900 ceteris paribus.

Q: What about specific basins, especially the Permian Basin?

A: In the Permian, we’ve been forecasting aggressive 2017 growth for months. Shortly after the OPEC meeting in November, we projected 150 rigs would return to work in the basin (assuming OPEC’s actions backed their words). In just six weeks since then, 40 rigs have already gone back to work in the play. We are standing by our +110 additional rig expectation there, which is the highest we’ve seen from anyone for the Permian this year.

10 Predictions for Oilfield Services in 2017


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Legal challenges related to oilfield contract labor and RigUp’s solution to mitigate risk

With labor misclassification lawsuits mounting for operators and oilfield services companies alike, it’s important that management teams identify a better solution for managing labor related risk.

The purpose of this post is to provide you with greater insight around labor misclassification for Oil & Gas related companies while also introducing RigUp’s solution to help you reduce misclassification risk.

The Profile of an Oilfield Independent Contractor

Many of the reasons for using independent contractors are well-understood by most Oil & Gas Companies. They include the following:

  • The cyclical nature of a commodity based industry requires O&G companies to quickly  and easily expand or contract their workforces to accommodate workload fluctuations.
  • Oilfield independent contractors have specialized technical expertise and certifications acquired through formal training and on-location experience which makes them highly sought after.
  • Specialized oilfield independent contractors insist on and indicate a strong preference that they be retained on a competitive, independent contractor basis.
  • Service pricing has traditionally billed according to time “on-location” making Independent contractors billable based on day rates while on location.
Current Economic Landscape

The considerable economic challenges of the last 24 months in the oil patch has caused great strife among industry professionals. Reduction in billable work and decreases in market rates have created income shortages compared to earnings during the good ol’ days of 2010 thru 2014 when weekly, domestic land rig counts consistently exceeded 1,800 and nearly eclipsed the elusive 2,000 mark on several occasions.

With rig counts hovering around 30% of the peak through the latest downturn, an environment has been created that encourages opportunistic legal activity related to labor misclassification, as out-of-work independent contractors seek income to cover daily expenses and back taxes owed to the IRS.

Classifying Independent Contractors

The US Department of Labor (“DOL”), the IRS, and each state have their own unique factors in determining whether an individual is an employee or an independent contractor. As an example, the DOL has a 6 point guide: webapps.dol.gov/elaws/whd/flsa/docs/contractors.asp

(1) Does the worker play an integral role in the business by performing the primary type of work that the employer performs for his customers or clients? Does the worker perform a discrete job that is one part of the business’ overall process of production? Does the worker supervise any of the company’s employees?

(2) How long has the worker worked for the same company?

(3) Is the worker reimbursed for any purchases of materials, supplies, etc.? Does the worker use his or her own tools or equipment?

(4) Who decides on what hours to be worked? Who is responsible for quality control? Does the worker work for any other company(s)? Who sets the pay rate?

(5) Did the worker make any investments such as insurance or bonding? Can the worker earn a profit by performing the job more efficiently or exercising managerial skill or suffer a loss of capital investment?

(6) Does the worker perform routine tasks requiring little training? Does the worker advertise independently via yellow pages, business cards, etc? Does the worker have a separate business site?

Here’s a more simplified summary: Independent Contractors must be treated as the competitive, professional business owners with the opportunity to win work in a competitive marketplace with the ability to invest in their own operation and growth.

Current Challenges

Innocent decisions made consistently over the course of peak business have created havoc for operators and oilfield services companies alike. Examples include:

  • Providing  non-cash incentives such as shared office space and company owned trucks to retain independent contractors.
  • Providing employee eligible benefits to independent contractors.
  • Stipulating and controlling independent contractor work hours.
  • Non-negotiable day rates.
  • Failing to provide defined project scopes.
  • Lacking documentation as to the professional, nature of the two entities.
What solutions does RigUp provide?

RigUp has brought to the Oil & Gas vertical the only free online marketplace with the same efficiency and transparency being realized in other verticals.

Legal Labor

Let’s talk about how we can help you today. Contact us at support@rigup.com or 512-501-5452.

www.rigup.com

Bidding & Procurement Using RigUp – 5 Ways Cabot and Silver Creek Succeed

In the last year, we have made significant improvements to our product to enhance usability for engineers, procurement professionals, and compliance managers within our online marketplace. RigUp has earned praise as “the best-in-class bidding & procurement solution for oil and gas.” While still keeping true to our core mission (helping operators and service companies connect more efficiently), we have listened intently to all user feedback, and continue to perfect and mold the platform to meet the needs of our ever growing user base.

To illuminate some of the changes that have taken place over the past year, RigUp turned to a few of our early adopters, Cabot and Silver Creek to analyze the impact. In our analysis, jobs were compared only if their work scope, location, and job requirements were identical from last year to this year.

Quote_Cabot Oil & Gast Corporation

Bidding & Procurement quote

As RigUp introduced more powerful bidding and procurement features such as bid templates, E&Ps and service companies alike have benefitted. For example, both E&P companies showed a significant increase in the number of unique service companies who submitted bids to win the work. Silver Creek had a 27% increase in submissions and Cabot saw well over double the amount of bid submissions over the span of one year. In addition, both E&Ps showed significant improvement in bid submission rates.

Bidding & Procurement Improvements

Despite WTI crude prices increasing 33%+ during the same time frame, Cabot saw costs savings ranging from 14% to 32% on RFQ’s year over year for identical job work scopes. These requests included coiled tubing unit packages, isolation tool work (well intervention), wireline pressure control equipment, coiled tubing motor and mill packages, and workover rig jobs.

Cost Savings Improvements

Silver Creek also saw cost savings of 9% on the same jobs over a similar year duration. The jobs being compared in Silver Creek’s analysis involve completion systems and well intervention by means of running new tubing on all wells with a liner hanger, liner-top packer, and toe-sleeve to test the liner prior to fracturing operations.


5 ways Silver Creek and Cabot leveraged RigUp to improve efficiency & reduce costs:

  1. Sourced more and new vendors through Open Market Bidding.
  2. Tapped into the power of RigUp Bid Templates to allow for apples to apples comparisons.
  3. Took advantage of RigUp’s permission settings and messaging functionality to make it easier for the technical owner and the purchaser to execute an RFQ much faster while maintaining security and transparency.  
  4. Utilized RFQ Reports which allowed for streamlined analysis of multiple bids – allowing Cabot and Silver Creek both to bid to more vendors.
  5. Awarding work and assigning call positions provided a clear call-out structure for their company men in the field.

To learn more about RigUp and sign up for FREE, visit rigup.com or give us a call at 512-501-5452.

5 Key Takeaways from the 2016 Wharton Energy Conference

 

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RigUp attended the Wharton Energy Conference in late October 2016, and we noted a few key insights that will undoubtedly follow the industry into 2017.

RigUp’s CEO and Co-Founder, Xuan Yong led an Upstream Panel that included David Keyte, Founder of Caerus Oil & Gas; James Obulaney, Vice President at Denham Capital; Vidisha Prasad, Managing Director of Guggenheim Securities’ Energy Investment Group;  Jerry Schretter, Managing Director and Co-Head of Upstream at Citi; Tom Tyree, Co-Founder, President, and CFO of Vantage.

A few questions from this panel included: What opportunities exist for mergers and acquisitions in the Upstream space? What assets are economic at $40 a barrel? When do non-core areas of U.S. shale gas come back to play? What’s the outlook for International shale, deepwater, oil sands? What are the ramifications for spending deferral in E&P?

Here are our 5 Key TakeAways from the Wharton Energy Conference: 

#1) The current down cycle has separated winners from losers. Independent E&Ps with quality acreage alongside best in class technologies have grown stronger. While culturally backwards E&Ps have become weaker.

#2) Super major oil companies are valued at a discount relative to leading independents (even in lower commodity prices).

This had made it extremely hard for super-majors to act as consolidators in the down-cycle. Leading independents have used their premium valuations in the public market to capitalize on further acquisitions strengthening their positions.

#3) Leading management teams in “shale” will be statistically driven.

No one drills “dry-holes” anymore. Binary outcomes made winners and losers in a “conventional” E&P world historically. Winners and losers are now made by running leaner and more sophisticated with operating leverage built into an E&P company’s business model.

#4) More distributed teams operating closer to the field. Where as Houston, Texas has historically been the center of E&P headquarters, we are observing a resurgence of E&Ps locating key engineering managers to locales closer to the asset base. Pittsburgh, Denver, and Midland are becoming more relevant than ever.

#5) L48 and North America in general are becoming the swing producer of hydro-carbons. It’s more than just energy independence, it’s energy prowess in the global world.

In summary, it should be no secret that the next up cycle will be dominated by a new class of nimble and sophisticated independent E&Ps.

RigUp can help E&Ps keep up and outpace their competition. Sign up for FREE today!

Questions? Comments? Contact lindsey@rigup.com or visit www.rigup.com to learn more.

The Environment at $30 Oil

When the outside world thinks about the oil & gas industry, they think about the most prominent news stories in the past decade. The industry as a whole is often vilified with little recognition given to the companies who act responsibly.

However, when oil is $30 a barrel, some companies cut costs anyway they can – even if that is in safety and environmental programs.

Environmental responsibility and sustainable operations are at the core of who RigUp is as a company. Our desire is to partner with companies who make EHS a priority in their business. We believe the desire to operate responsibly should be intrinsic to a company and not solely reliant on external pressures.

Our mission is to connect operators with service providers through a common goal: effective, efficient, and safe operations. We seek to maintain a marketplace where the safest and most environmentally conscious companies can thrive. Since the beginning we have strove to build our company on the foundations of responsibility, and better business.

Regardless of the price of oil, our likeminded team is committed to achieving lasting change in one of the world’s largest industries. We are dedicated to a better future.

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