We have just returned from a one-day trip up to and back from East Texas. Mixed outcome on this trip. On the positive front, we had breakfast at Whataburger, lunch at Cracker Barrel and dinner at Dairy Queen, thus we are making good progress on our quest to break 150 pounds this year. On the negative, the near-term outlook is a bit less optimistic than what we gleaned during our last East Texas trip in early June. Sentiment can change quickly, hence the need to be in the field on a frequent basis.
Frac Activity. On our last trip, we tallied about 8 frac crews running in the ETX/N.LA region. On this trip the count is up to about 10, so some progress. However, on our last visit, a number of contacts expressed optimism about a mid-teen’s frac crew count by late summer. That hope has largely faded given persistent weak natural gas prices. In early June, locals assumed reduced associated gas production due to the oil well shut-in’s and lower oil-directed activity would lead to better nat gas fundamentals. Unfortunately that hasn’t really happened as nat gas remains sub-$2.00. According to local contacts, the lower price is leading some customers to hold flat for now, but could pick up late this year as the forward curve is more conducive with 2021 pricing in the mid-$2’s. Of note, some service companies also see a seasonal slowdown/Q4 budget short-fall potentially playing out. Obviously, a lot can change between now and Nov/Dec, but that’s the view as of today. But while frac activity appears to be leveling off, other services such as well servicing are still seeing some signs of improvement. One company reports a fairly good view into the next several weeks and anticipates its utilization will nudge higher. Several E&P’s who hit pause are starting to get back to work, just not on frac. Pricing for everything remains horrible.
Dual Fuel Transition. Pay attention to this. Months ago, we highlighted rising E&P inquiries into frac companies about their respective dual fuel offerings/capabilities. Now the inquiries appear to be moving towards mandates. Consequently, frac companies are now making inquiries into engine OEM’s regarding dual fuel kit availability. This means some frac companies might elevate, albeit slightly, 2020 capex spend as the need to outfit units with dual fuel capability could be the difference between winning and losing work. It is our understanding E&P’s are not formally discriminating against Tier 2 vs. Tier 4 kits, but they probably will in time as the Tier 4 option, we believe, has a lower methane slip and offers slightly higher substitution rates. Further, we believe the E&P focus is more about lower emissions than reduced diesel costs. The need to spend more capex does not come at a good time for the frac industry since no one is making much money. Also, one contact reports this growing push for dual fuel, while not widespread yet, will suppress the value of legacy Tier 2 equipment even more. To be fair, not all E&P’s care about ESG so there will still be some life for legacy equipment, just not as much. In our opinion, if you want to work for large E&P players who offer dedicated programs, the need to provide more emission friendly equipment is quickly evolving. And, if everyone makes a mad dash for dual fuel kits, we wonder what happens to lead times?
Other Nuggets. (1) One service company reports a large E&P is building out its own local power grid which will power rigs and frac crews beginning in 2021. This project, we believe, is in Louisiana. (2) In our note this past Sunday, we reported a new frac company. That generated some buzz from industry contacts. On this trip, we heard further confirmation our reporting is likely correct. We believe this new company will focus its efforts in Texas.
Permian Trip. We will drive over to Midland on Sunday. If you are lonely, bored and up for a Daniel Energy Partners deposition on either Monday or Tuesday, let us know. We’d like to stop by and bother you.