Why The 'Real Deflategate' Is Happening In Oil Services

In a recent report, analysts at Citi took a look at plummeting shale well drilling costs.

According to the report, investors can expect shale well costs to continue to fall through 2016.

2015 Outlook

Analysts predict that the average cost of drilling a shale well could fall by up to 25 percent by the end of 2015. After initial pushback to the idea of such high deflation rates, service companies now seem resigned to the idea that prices could fall this sharply.

Citi analysts point out that their price forecasts are in-line with the forecasts of many exploration and production (E&P) companies.

Falling Price Breakdown

According to the report, fracking comprises 40 percent of the average cost of drilling a shale well. Fracking prices have already fallen by 15 percent, and analysts predict another 10 percent drop is on the way.

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Rig rates, which typically make up about 15 percent of well drilling cost, will likely fall by about 20 percent.

Finally, analysts see further cost reduction as drill times improve by about 10 percent.

Analysts also anticipate significant cost reductions in minor drilling segments such as drill bits, technical services and site development.

Is A Recovery On The Horizon?

Citi analysts believe that a rebound scenario in the space will not be a possibility until 2017. They are forecasting a 2-3 percent additional reduction in shale well drilling costs in 2016.

Stock Picks

Citi believes that investors should make a long-term play by buying shale-levered stocks on any short-term dips.

Citi has Buy ratings on Baker Hughes Incorporated BHI, Halliburton Company HAL, Patterson-UTI Energy, Inc. PTEN and Weatherford International Plc WFT.

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