Facing Backlog, US Oil And Gas Producers Building Service Sides

Date : 04/22/2011 @ 1:09PM
Source : Dow Jones News
Stock : Bronco Drilling Company, Inc. (MM) (BRNC)
Quote : 11.0  0.0 (0.00%) @ 2:05AM

Facing Backlog, US Oil And Gas Producers Building Service Sides

Chesapeake (NYSE:CHK)
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The North American shale boom has led to months-long waiting lines for scarce oilfield equipment like drilling rigs and pumping trucks. As a result, companies like Chesapeake Energy Corp. (CHK) are taking matters into their own hands.

Last week, Chesapeake announced that it will buy oilfield equipment contractor Bronco Drilling Co. Inc. (BRNC) and its 22 rigs for $315 million. It badly needs them: Chesapeake is the most active driller in the U.S., employing about 160 rigs with plans to boost that to about 200 by year's end as it scrambles to meet drilling obligations outlined in joint venture agreements and boost its oil output amid high prices. The Oklahoma City company wants to eventually own two-thirds of the rigs it has drilling and the Bronco deal will push Chesapeake's fleet to 117.

Chesapeake isn't alone in its quest to supply its own services. Those producers are signaling that "they believe the market in North America for service equipment is going to remain tight for the next several years and they're struggling to have access to equipment," Barclays Capital analyst James West said.

There are 1,800 rigs drilling in the U.S. for oil and gas, up 21% from a year ago, according to oilfield service company Baker Hughes Inc. (BHI). The rise has come as producers scramble to unlock newly profitable reservoirs, including deeply buried shale formations, that are more difficult to crack than conventional oil wells.

In particular shale drilling, which requires millions of gallons of water to be forced underground to fracture the rock formations, has put a premium on pressure pumping services. Some producers now wait as long as six months between the time they drill a well and when the shale is hydraulically fractured.

This isn't the first time producers have owned rigs. Decades ago, it used to be common practice, but in the 1980s they began shedding them amid falling oil prices. Some analysts believe the trend of buying rigs is a short-term fad limited to a few energy producers.

Simmons & Co. analyst Bill Herbert said in a client note that while Chesapeake's Bronco purchase shows that rig availability is "perhaps becoming more of a choke-point than many realize," plenty of producers are "loathe" to enter the service business because of "inefficiencies and questionable returns," Herbert said.

At the same time, oilfield service companies are rushing to meet the demands of energy producers. U.S. onshore drillers, for instance, have 119 new rigs on order and are refurbishing older, idled equipment to send back out into the oil patch, according to Simmons & Co.

Yet some companies find cost savings in ownership of oilfield equipment. Pioneer Natural Resources Co. (PXD) Chief Executive Scott Sheffield said the Irving, Texas, company envisioned an equipment backlog when it began building a hydraulic fracturing business and later added 12 drilling rigs.

Those assets, Sheffield said in an interview, "helped us not have the shortages that some of the other companies have." They've also helped Pioneer trim about $500,000 from the price of each well in the company's Spraberry field in west Texas where its drilling rigs operate.

Clayton Williams Jr. said owning a fleet of 12 rigs gave his eponymous oil company the ability to pounce on an offer from Chesapeake this spring in which the larger company would give Clayton Williams Energy Inc. (CWEI) a majority stake in some west Texas oil fields if it drilled wells there. With its own fleet, there was no need for lengthy negotiations with drilling contractors, Williams said in an interview.

"I'm inclined to buy more rigs," he said. "It lets you control your own destiny."

In the case of Chesapeake, that quest for control can take on a life of its own. The company has built an oilfield trucking fleet and other service subsidiaries that rank among the largest in their sectors in the U.S. And Chief Executive Aubrey McClendon told investors in New York recently that the company plans to add considerable pressure pumping equipment to its holdings.

Eventually, McClendon said, Chesapeake may consolidate its service subsidiaries and spin off what would be one of the largest U.S. service companies.

-By Ryan Dezember, Dow Jones Newswires; 713-547-9208; ryan.dezember@dowjones.com

 
 

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