Analysis: Ask most people in Midland, Texas about the ghost squadron and you'll get directions to the Commemorative Air Force Museum at Midland International Airport. Here a group of dedicated personnel restore vintage World War II aircraft to like-new flying condition as part of a living history museum.
But there is another ghost squadron 10 miles west of Midland International Airport and it, too, is undergoing restoration. Here, more than 130 well service rigs are stacked in neat rows on the sandy plains of West Texas. And like the World War II aircraft at the museum, many of these units will be brought back to full service as part of a multi-year quarter-billion-dollar refurbishment program underway at Key Energy Services.
Key is the nation's largest well servicing contractor. The company was the major industry consolidator in the late 1990s, rolling up small and not-so-small privately held regional companies into an investor-owned business with more than 1,400 well service units. The company has gathered stacked equipment from across the Permian Basin and relocated it to the Odessa yard where workers are disassembling each unit, cataloging the components, and replacing or remanufacturing any part that is not in perfect condition. Those components comprise a ready-to-use inventory for the company's refurbishment program.
For service rigs, the program involves taking the unit down to the carrier frame, going through the blocks, elevators, drums, linkage, gear boxes, hydraulic systems, and the mast. The carrier gets a newly remanufactured derrick and drawworks, new air and hydraulic systems, new controls, is repowered with a new fuel-efficient Detroit Diesel Series 60 engine, and becomes a completely refurbished rig in six to eight weeks.
The units, painted the customary royal blue and white, are then assigned to a specific customer or allocated to one of the company's yards throughout the Permian Basin.
The nation's well service fleet once totaled 8,500 units in the early 1980s. The subsequent downturn in the oil portion of the oil and gas industry created a brutal economic environment for service contractors, which resulted in extreme attrition to the fleet. Today, less than 3,500 rigs exist in the U.S. and approximately 60 percent of those are in the fleets of just two companies: Key Energy Services and Pool Well Services, a division of Nabors Industries.
Oil-rich areas like the Permian Basin are proving attractive to major companies as reservoir management technique and enhanced recovery slows the decline curve and provides savvy operators an attractive margin. The humble well service unit is a key component in wringing extra dollars out of mature reservoirs and keeping individual wells viable.
Complicating life in the well service industry is the inability to achieve any type of pricing power that would enable the industry to retool at a time when customers are demanding better service. The economics of new rigs are daunting. Payout runs about 18 years at current pricing levels. That leaves refurbishment as the only option.
"What we have done in the past is pull a drum out, replace the brake flanges, and put the drum back, or take an engine out, rebuild it, and put it back, then just run it and run it and run it," explains Tommy Pipes, Group Vice President for the company. "What we are doing now is a complete refurbishment on a scheduled basis. We pull from the stacked fleet as opposed to bringing our rigs in from the field, refurbish them, and then send them back out."
Nationwide, the company has refurbished more than 300 units since January 2000, and plans to redo approximately 85 to 100 units per year. To get a feel for the scope of this operation, this ghost squadron would constitute the nation's third largest well service fleet were it a standalone business unit. At the current pace, the company’s 900 active rigs will undergo complete overhaul in less than a decade.
To do so, Key created the Central Repair Center in Midland and has four other repair centers in Hobbs and Farmington, New Mexico, El Reno, Oklahoma, and Casper, Wyoming. Even so, the company is still contracting refurbs in alliance style relationships with industry manufactures. The current downturn in field activity provides Key an opportunity to allocate rigs to regional or national equipment manufacturing companies, which helps those businesses retain qualified crews in what would otherwise be a slack business environment.
But the major part of the program is performed by crews at the Key repair facilities. "Pulling a component off our existing equipment, remanufacturing it, and having it ready saves time and money so we are reducing a refurb that could cost $300,000 down to $200,000 or $250,000," Mr. Pipes explains. Payout runs about three to four years on refurbished units.
Not all service units in the ghost squadron will be refurbed. Smaller and older units will be cannibalized for parts, but Key plans to rebuild bigger service unit models like the Franks 1287s, Coopers, Wilsons, Skytops, and Crane Carriers.
The company has also implemented a computerized maintenance system to track parts, manage inventory, and reduce equipment maintenance and operating costs through standardized maintenance and repair processes. The capex program will go forward at the rate of $80 to $90 million annually. Key has already invested more than $200 million since January 2000 for capital improvements to its fleet of drilling rigs, oilfield trucks, and well service units.
"All of our customers are focused on managing these mature secondary and tertiary projects out here as economically as possible and we are a big part of that," Mr. Pipes explains. "The refurb program means less down time. And if we can be efficient operators and bring more value to our customers, at some point they are going to want us to be profitable enough to where we can buy new equipment. But for right now, the fact that we have this fleet out here to work from is a good situation for everybody."
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