The move to multi-well pad drilling has been saving oil and gas producers big bucks. Companies, such as Chesapeake Energy (NYSE:CHK), are looking to capitalize on the practice to save between 15%-30% per well. That adds up to substantial cost savings over time, allowing producers to drill more wells with less money, which has a nice effect on profits.
On the other hand, these cost savings have come out of someone else's pocket. In this case, the trend toward multi-well pad drilling has been costing oil-field service companies like Halliburton (NYSE:HAL) and Baker Hughes (NYSE:BHI) as declining rig counts during the transition phase has slowed growth. However, both see this as an opportunity over the long haul.
Embracing the challenge
Baker Hughes CEO Martin Craighead had good things to say about multi-well pad drilling on the company's most recent conference call. While he wouldn't break out how much of its business is being shifted to pad drilling, he did say that "the amount of revenue that we earned this quarter is twice what we earned this time last year." He went on to say that "it's surprising how much is being converted to these pad locations so quickly." He further noted that, after making some changes to the company's product mix, its business is up "100% year-on-year on the pads." Finally, he said that the margins are huge and can be 30%-50% higher with pad drilling, which is why his company isn't fretting.
Halliburton CEO Dave Lesar also sees long-term positives for his business as more producers make the switch:
... [These] incremental drilling efficiency gains will provide for higher service intensity. ... Ultimately, we believe this efficiency trend bodes very well for us in the long run as our scale and expertise allows us to lead the industry in executing factory type operations. And despite issues around capacity, utilization and pricing, for the balance of the year, we do expect North American margins to continue to improve.
While it's easy to think that he could be saying that just to calm investors' fears, the fact that many oil and gas producers are increasing capital spending would indicate that he's correct.
A combination of factors has Whiting adding $300 million to its $2.2 billion capital program this year. CEO James Volker noted that these funds would be used to accelerate the company's drilling program. Specifically, he pointed out:
... [The company's] most recent wells have benefited from longer laterals and larger sand volumes. We believe our completion practices translate into higher EURs and greater returns on capital. We are moving into development mode in this area with the recent arrival of a second pad capable rig.
That quote really shows the correlation that Halliburton expects with pad drilling leading to increased service intensity, which in this case is longer laterals and larger sand volumes.
Pad drilling allows producers to do more with less capital. Pioneer Natural Resources (NYSE:PXD), for example, noted in its earnings release that pad drilling saves $600,000-$700,000 per well and will result in Pioneer being able to drill 130 wells with 10 rigs in 2013 compared to drilling a similar number of wells in 2012 with 12 rigs. That's big savings for the company and it's a real driver in Pioneer's ability to grow its production and returns.
Going back to Chesapeake for a moment, the cost savings are pretty remarkable for it as well. For example, it costs the company $8.5 million to drill the first well in the Utica Shale; however, it can then drill the next five wells on the pad at an average cost of $5.9 million, or a 30% reduction. That's why the company is aggressively moving to bolster its revenue by moving to multi-pad drilling across its other core plays. For example, it plans to drill 50% of its Eagle Ford wells on multi-well pads during the second half of this year and bump that amount up to 75% next year.
Finally, the move to multi-well pads has really improved returns for Bakken producers in particular. While rig counts are down 20% in the region from the peak, well starts are actually up 20%. This has really cushioned Continental Resources' (NYSE:CLR) bottom line. The company has used multi-well pad drilling to shave $7.5 million and 73 days off the cost of drilling six wells, enabling it to grow its production faster and cheaper than before. In fact, this year it predicts that multi-well pads will shave another $300,000 off the costs of each well, which will get its completed well costs down to $8.2 million. When combined with its other cost savings, a million dollars will be knocked off its historical well costs. That improves the company's rate of return from 50% to 60% with oil at $100 per barrel.
Final Foolish thoughts
Oil and gas producers really have embraced multi-well pad drilling, which isn't a surprise given the big effect it has on returns. The move initially cut into rig counts and affected the growth of oil-field service companies like Baker Hughes and Halliburton, but both see opportunities ahead. That could mean that everyone wins.