In light of developments in recent years, it has become increasingly apparent that operators and suppliers must be prepared to navigate uncertainty and risk in their contractual agreements.

This commentary aims to examine how fluctuations in commodity prices impact US shale drilling and completions service prices. We have assumed $100 and $60 per bbl brent for our high and low cases respectively.

It has been observed that prices for onshore US drilling and completions services have decreased by almost 5% since the beginning of the year until 2Q 2023.

We expect these service prices to continue declining, albeit at a much slower pace, through 4Q 2024.

Volatility in commodity prices could cause service prices to fluctuate dramatically in either direction.

For example, drilling and completions pricing would rise by 26% in a high commodity price environment and fall by 20% in a low commodity price environment.

Spot land rig rates for 1,500 horsepower(HP) AC rigs have been falling on the backs of declining activity in 2Q 2023. US rig counts are down by 35 month-on-month, 67 quarter-on-quarter, and by over 80 in the past eight months.

The buyer’s market is relatively fragmented, with 330 operators running less than two rigs on average during 2022, accounting for 46% of the total land rig market.

Given the significant impact that oil price fluctuations can have on the operations of private and small operators, there is a vast range of potential spot land rig day rates that may be observed in the next 18 months.

In our high case, elevated prices would drive land rig rates above $38,000 per day.

Conversely, lower commodity prices would see rates fall to $23,000 per day by Q4 2024.

A lower oil price environment would impact the frac services pricing even more drastically.

As activity would decline due to lower oil prices, frac crews would have an easier time than their rig counterparts relocating to different basins in the hopes of staying active.

This would increase basin-specific supply and drive service prices further down. Service prices would fall by 25% in our low case through 4Q 2024.

Prices for frac services and frac sand are expected to see marginal decreases of 4% from now until 4Q 2024.

In an elevated price environment, fresh frack water prices would rise by 35% from their current levels.

A lower commodity price environment would see fresh water pricing drop by nearly 17%.

Directional drilling day rates have also started to fall from their Q1 2023 peaks.

We expect them to decrease by $1,700 per day by the end of Q2 (from Q1).

From 2Q 2023 to 4Q 2024, we’d expect another 4.3% decline in day rate pricing.

However, this would fall by just under 10% in a lower oil price environment.

There is far more risk of prices heating quickly in a higher price environment; elevated oil prices and their subsequent drilling activity increases would cause drilling services day rates to grow by over 18% from Q2 2023 to Q4 2024.

However, while prices have been falling throughout the year, there will be a lag for those to be reflected in companies’ average well cost performance metrics.

If you take a sample well in Delaware South, wells completed in 2Q 2023 will see a $700,000 per well cost increase relative to 4Q 2022.

The legacy contracted rates, which are higher than the current spot levels, are causing an increase in these metrics.. We’d expect this to cause some confusion during earnings season, as costs per completed well go up, but spot service prices continue to fall across categories.

While shale spot service prices have been falling during 2023, larger operators negotiating significant dollar-value contracts will face unique challenges versus their private counterparts in actualizing these potential well cost savings.

Service companies know that public operators have historically held to their public production guidance.

This puts pressure on certain activity levels and timelines that do not help their cause when negotiating for price reductions.

Private companies are better positioned to wait during similar contract negotiations for optimal pricing in lieu of chasing promised barrels.

Additionally, work specification differences, supplier obligations, and mandates, and a plethora of other work package details can knowingly or inadvertently drive service prices above averages.