Financial Hardship, Opportunity with Low-Priced Used OFS Equipment

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By William Carroll

"Low prices of crude oil and natural gas (even with West Texas Intermediate near $50 per barrel) have placed a choke hold on exploration and production activities in the United States, causing a rapid decline in rig count and oilfield operations. As this decline has occurred, oilfield services (OFS) companies have experienced increasing economic hardship, forcing some to reorganize their capital structure and others to liquidate assets in order to raise cash. The situation has produced a sharp decline in the value of oilfield equipment and is adversely affecting the accounting treatment of oilfield equipment on company financial statements. However, it’s also possible that a few cost-saving measures may be leveraged from low equipment pricing, such as reduced ad valorem property taxes and property insurance premiums.

Unprecedented Declines in Oilfield Equipment Prices

The magnitude of the recent decline in the price of used oilfield equipment is unprecedented in recent times. It wasn’t too long ago that equipment manufacturers supplying OFS companies had a huge backlog and that used equipment in working condition was largely unavailable. Today, there is a surplus of used equipment available at a fraction of the price commanded just a few years ago. For instance, in mid-February, three equipment spreads used in hydraulic fracturing sold at an auction in Midland, Texas for an average price of $5.5 million, compared to their new cost (in 2010-2012) of $25 million to $30 million for each spread. Most recently, two 2015-model fracture pumps sold for $300,000 each at an auction in Fort Worth, Texas, and four more 2015 models sold in Odessa, Texas for $400,000 each— compared to a new cost of about $1 million each..."

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