Guide to Oil & Gas Equipment & Services Industry KPIs

Geophysical methods are used to explore and understand the subsurface characteristics of potential oil and gas reservoirs. Geophysical services enable companies to make informed decisions from exploration to production optimization. Within the oil and gas equipment and services industry, companies provide a range of tools and services related to geophysics:

• Seismic data acquisition: Companies specialize in acquiring high-quality seismic data using advanced equipment such as seismic sensors, data recorders, and processing software.
• Interpretation services: Skilled geophysicists interpret the seismic data to create detailed subsurface maps, identify potential drilling locations, and provide insights into reservoir characteristics.
• Seismic imaging software: Software tools are developed to process, analyze, and visualize the vast amounts of seismic data collected during exploration and reservoir monitoring.
• Reservoir simulation: Advanced software simulations use geophysical data to model reservoir behavior, predict production rates, and optimize recovery strategies.

Backlog is a key parameter used to assess the performance and future prospects of geophysical services companies. Backlog represents the total contractual value of projects that have been awarded to the company but not yet completed or recognized as revenue.

Contract drilling is crucial in the OFSE industry. Drilling is the process of creating holes or wells in the Earth’s surface to extract hydrocarbons such as oil and natural gas. This is a crucial step in the exploration, development, and production of oil and gas resources. Our focus in contract drilling is specifically on onshore companies.

Contract drilling involves providing drilling services to oil and gas exploration and production (E&P) companies, also known as drilling operators, on a contractual basis. Contract drilling companies, also known as drilling contractors, typically own and operate drilling rigs, offering their services to energy companies looking to extract oil and gas from the ground. Alternatively, a small group of contract drilling companies may also pool their resources to operate drilling rigs together.

Contract drilling involves:

• Onshore/onsite or land drilling
• Offshore drilling

Onshore or land drilling involves drilling oil and gas wells on land instead of underwater. Rotary rigs are commonly used for this type of drilling. Land drilling usually has shorter construction times for wells, which means the rigs used tend to be smaller. Offshore drilling is a mechanical process of drilling wells below the seabed to explore and extract hydrocarbons. Contractors in offshore drilling specialize in various water depths: shallow water (less than 1,000 ft), midwater (1,000 ft to 4,000 ft), and deepwater (greater than 4,000 ft). Ultra-deepwater operations occur in water depths exceeding 7,500 ft.

Drilling contractors generate contract drilling revenue by entering into a contract with drilling operators to provide drilling services. Three main types of drilling contracts exist within contract drilling:

• Daywork contract: This is the most common contract type in the industry. In a daywork contract, the drilling contractor charges a fixed daily rate for both the rig and the workers, along with additional expenses, until the well is finished or abandoned. The overall cost of the well depends largely on the time taken for drilling and completion. This type of contract provides more flexibility but may pose financial risks to the operator if the drilling takes longer than expected.
• Footage (or depth) contract: Under this contract, the drilling contractor is paid based on the depth or footage drilled. The rate is agreed upon per foot or meter drilled. This type of contract provides cost certainty for the operator but may present challenges for the drilling contractor if unexpected drilling difficulties arise.
• Turnkey contract: In this contract, the drilling contractor agrees to deliver a completed well for a fixed, agreed-upon price. Here, the contractor assumes the risk of cost overruns and delays.

Contract drilling revenue is a function of the rig days also known as actual operating days and the average day rate. The revenue generated from contract drilling can be calculated by multiplying the actual operating days by the average day rate. Here, actual operating days are the number of days the drilling rig is actively engaged in drilling operations. The average day rate is the average daily fee charged by the drilling contractor for the use of the drilling rig and associated services. The average day rate is also referred to as the average revenue per day and is a function of the location, depth, and complexity of the well to be drilled, operating conditions, duration of the contract, and the competitive forces of the market.

The calculation of rig days in the oil and gas industry can be approached in two ways:

1. The Number of Active Rigs x Number of Days in a Quarter
2. Potential Operating Days x Utilization Rate

Here, active rigs are the number of rigs actively drilling for oil or gas during a given period. The number of active rigs is typically calculated by applying the utilization rate to the total rig fleet. The formula is as follows: Number of Active Rigs=Rig Fleet × (Utilization Rate /100​). Rig fleet is the total number of rigs available in the fleet, while utilization rate is the percentage of rigs actively drilling.

Typically, a quarter consists of 3 months, so the number of days in a quarter would be either 90 or 91 days, depending on whether you’re using a standard or a fiscal quarter.

Potential operating days are the total number of days in the quarter, assuming all rigs are active daily. Potential operating days can be calculated as rig fleet multiplied by the number of days in a quarter. This approach assumes that all rigs in the fleet are operational every day, and it provides an estimate of the maximum possible operating days given the total number of rigs in the fleet and the duration of the quarter.

And lastly, the utilization rate is the percentage of time that rigs are actively drilling out of the potential operating days.

Completion & production (C&P) is another critical segment within the OFSE industry. It focuses on activities that occur after the exploration and drilling phases, specifically in bringing a well into production, also known as well completion, and maximizing its output.

Well completion encompasses the last stages of drilling to ready the well for production. This includes installing casing, perforating the casing to allow oil or gas to flow into the wellbore, and setting up production tubing. C&P companies provide various technologies and services for well completion, such as hydraulic fracturing, also known as fracking or pressure pumping, cementing, sand control, and well stimulation.

Completion & production revenue is typically calculated as the sum of revenue generated from pressure pumping or hydraulic fracturing services and revenue from other services. Hydraulic fracturing, commonly known as ‘fracking,’ involves injecting a high-pressure fluid mixture, typically consisting of water, sand, and chemicals, into a wellbore to create fractures in the rock formations deep underground. These fractures allow for the extraction of oil or natural gas that would otherwise be difficult or uneconomical to recover using conventional drilling methods.

Hydraulic fracturing revenue comprises the income generated specifically from providing hydraulic fracturing services, including fees for designing, executing, and monitoring hydraulic fracturing operations, as well as any revenue from equipment rental, chemical sales, proppant sales, and other related activities directly tied to hydraulic fracturing operations.

Hydraulic fracturing revenue is calculated by multiplying the average number of active fleets by the revenue per active fleet. Here, the average active fleet refers to the average number of hydraulic fracturing fleets a company has deployed and operated during a specific period, such as a quarter or a year. A hydraulic fracturing fleet typically consists of multiple fracturing units, including pumps, trucks, and other equipment necessary for fracturing operations. Further, average active fleet is calculated as the total fleet multiplied by the utilization rate. Here, the total fleet is the total number of hydraulic fracturing fleets that a company owns or operates, while the utilization rate represents the percentage of the total fleet that is actively deployed and in use at any given time.

Revenue per active fleet is the average revenue generated by each active hydraulic fracturing fleet over the same period. It includes all revenue sources associated with hydraulic fracturing operations, such as service fees, equipment rental fees, chemical sales, proppant sales, and other related revenue streams.

An alternative approach to calculating hydraulic fracturing revenue is via horsepower. This method involves quantifying the revenue generated per unit of horsepower deployed in hydraulic fracturing operations. To calculate hydraulic fracturing revenue based on horsepower, you multiply the average active horsepower by the revenue generated per horsepower.

Diversified oil & gas equipment & services companies are those that provide a wide range of products and services to the oil and gas industry. Diversified oil & gas equipment & services companies offer a full suite of integrated services and equipment to E&P companies. These companies often have operations across various segments of the oil and gas equipment & services value chain. Their services can include equipment manufacturing, drilling services, completion services, engineering and construction, and much more.

Diversified oil & gas equipment & services companies have a backlog of orders or contracts that have been secured but not yet completed. Analysts often use the backlog value to forecast future revenue. They track the value of the backlog, the expected completion timeline, and any new contract wins or cancellations to estimate revenue. Some other key metrics commonly used to evaluate these companies:

• Net order value
• Energy rigs
• Revenue per rig
• Book-to-bill ratio

Engineering & construction (E&C) companies within the OFSE industry play a crucial role in the development, maintenance, and expansion of infrastructure for oil and gas exploration, production, transportation, and refining. These companies provide various services and expertise, including designing oil and gas facilities such as refineries, pipelines, offshore platforms, and LNG terminals.

Engineering, procurement, and construction (EPC) contracts are one of the primary revenue sources for many E&C companies. These contracts involve the company taking responsibility for the entire project, from designing and engineering to procuring materials and constructing the facility. After the construction phase, E&C companies often secure contracts for the ongoing maintenance and operation of the facilities they have built. This provides a steady stream of recurring revenue over the life of the asset.

Often, E&C companies within larger conglomerates might have separate segment reporting. Revenue is typically calculated as a sum of the different revenue segments of an E&C company. Analysts look for the specific revenue figures related to the oil & gas sector within these segments.

Understanding certain key metrics such as beginning backlog, ending backlog, backlog value, and orders is crucial in analyzing the revenue flow of E&C companies. These metrics provide insights into the company’s project pipeline, the value of work to be completed, and future revenue expectations.

• Beginning backlog refers to the total value of projects that a company has already secured but has not yet started work on at the beginning of a specific period, such as a fiscal year. It represents the revenue that the company expects to earn from these projects as they progress and are completed.
• Ending backlog is the total value of projects that a company has secured but not yet completed at the end of a specific period. It includes projects that were in progress during the period and new projects that were secured but not yet started.
• Net order value refers to the value of new contracts or projects that a company has secured within a specific period.
• The book-to-bill ratio compares new orders (bookings) to billed revenue, indicating the health of the company’s order backlog and potential future revenue growth.

Compression equipment and services companies play a crucial role, particularly in the midstream and downstream sectors of the oil & gas industry. Compression equipment is used to increase the pressure of natural gas or other hydrocarbon gases as they move through pipelines or processing facilities. This is necessary for several reasons:

• Pipeline Transportation: Natural gas travels long distances through pipelines from production fields to end-users. Compression stations along the pipeline route help maintain pressure to keep the gas flowing efficiently.
• Gas Processing: During the processing of natural gas, compression is needed to move gas through various stages such as dehydration, sweetening, and liquefaction.
• Storage: In some cases, compressed gas is stored underground in depleted reservoirs or salt caverns. When needed, the gas can be released and recompressed for distribution.

Compression equipment and services revenue encompasses two main streams: compression services revenue and revenue from other equipment and services. Specifically, compression services revenue is determined by multiplying the active horsepower by revenue per horsepower per month.