Tight labor, rising wages crimp Permian Basin oil production & exploration

By Bryan Livingston
Managing Partner

The Permian Basin’s tight labor supply will continue to vex drillers for the remainder of the year, as exploration and production in the nation’s most prolific shale formation ramps up amid rising oil prices.

A recent Wall Street Journal article notes that only five of the top 20 U.S. shale oil operators generated more cash than they spent in the first quarter of 2018, despite rising oil prices. There are a variety of reasons for this, but tight labor and rising wages are among the key issues facing shale E&P companies in the Permian.

“Early signs of labor tightness motivated Parsley Energy to increase drilling and completion activity significantly last year when rigs and crews were easier to come by,” Parsley Chief Executive Bryan Sheffield told the WSJ. “[N]ow that we are operating at a steady development pace, we should continue to generate increasing cash flow.”

Labor shortages could significantly affect the Permian Basin’s rate of growth for the remainder of the year, if shortages put a damper on drilling activity. The time needed to get wells into production could drag out if companies cannot find the necessary labor.

There were 467 active rigs in the Permian Basin the week of May 18, according to Baker Hughes, compared to 361 a year ago and 137 in 2016. In comparison, the next most active shale basin in the United States, the Eagle Ford, has just 77 active rigs.

Although the Permian Basin is extremely active right now, the labor situation will continue to worsen if oil prices stabilize between $70 and $80 per barrel by year-end — where they currently sit and where Capital Alliance Corp. expects them to be when we close out 2018.

In February, the Permian Basin Regional Planning Commission examined the workforce in the region and reported the unemployment rate at the time was 2.9%, lower than the Texas rate of 4% and the national average of 4.1%. In April, the U.S. Bureau of Labor Statistics reported that the national unemployment rate had edged down to 3.9% so it’s probable that the unemployment rate in the Permian Basin has also declined since the commission did its workforce study.

While there is much to cheer about, tight labor and related rising costs are the downsides to the current activity in the Permian.

Labor market indexes continue to point to rising oil & gas employment and more employee hours, with growth primarily driven by oilfield services firms, according to the latest Dallas Fed Energy Survey.

The higher costs of doing business have raised the average break-even price in the Permian to $50 per barrel, up from $48 a barrel last year, according to the Dallas Fed’s March 28 energy survey in which 136 oil & gas firms responded to a special-questions survey.

In the special-questions survey, 51% of executives responding said they expect the number of employees to increase from 2017 levels, with 11% expecting a significant increase in employee counts and 40% expecting a slight increase.

Although we haven’t seen it yet, labor shortages may ultimately translate into slowing output and a declining or stabilizing rig count in the Permian, unless companies can successfully recruit from distant communities where the unemployment rate isn’t so low. They may also have to pay more, all of which will impact profits.

M&A activity in the OFS space is likely to surge in coming months, as companies who provide labor-intensive services see improving performance and many months of strong results ahead.

Capital Alliance Corporation is a Dallas-based investment banking firm with an extensive international reach and a 40-year history of providing trustworthy advice to private company shareholders who want to sell their businesses. Our team has deep operational and M&A experience across many sectors, including energy infrastructure.