Rising oil prices have eased financial pressure for scores of U.S. drillers, but higher oil field service costs could kick in soon.
As companies return to oil patches with new fleets of rigs, the costs of newly hired crews, frac sand, pressure pumps and other equipment used to blast open shale rocks could quickly rise, possibly creeping up by 20% before the end of the year, Houston investment bank Tudor, Pickering, Holt & Co. said this week.
In oil price terms, that could raise break-even levels for shale drillers by $10 a barrel, eating into cash that drillers need to churn out oil from new oil wells, said David Pursell, head of macro research at Tudor Pickering.
“Prices have to go up if activity is going to increase,” Pursell said. “You’re going to have to put more equipment to work, and you’re going to have to put more people on that equipment.”
Cost inflation could pose a challenge for oil companies that have already stretched their financial resources and rely mostly on cash they make from selling oil. These firms, some already saddled with debt they’re trying to pay off, may have to issue new shares to support increased capital investment plans this year, Pursell said.
Some hydraulic fracturing equipment suppliers have already increased prices 20% to 40%, but these increases haven’t come close to making suppliers profitable again after relentless cost cutting over the past two years, said Bill Herbert, an analyst at Houston investment bank Simmons & Co., part of Piper Jaffray.
“There’s going to have to be a convergence between the growth aspirations of oil companies and the margins of the oil field service industry,” Herbert said. “The system is already getting tighter and strained.”
Herbert said his firm expects the number of oil and gas rigs to climb to an average 770 this year, up more than 13% over the latest figure published by RigData.