We are reporting live this week from vacation in Seaside, Florida. And because we are on vacation and can only work when the lovely bride won’t see me, notes over the next few days will be written quickly; will likely be brief; and may have a few typos. We did bring a printer, but I haven’t received spousal approval to set it up, thus it’s hard to proof one’s work. Apologies in advance.
On another note, should any energy friends happen to be in or around the Seaside area this week, let me know. Would love to grab a beer. Talking shop is much more fun than people watching at the beach.
As for the world of oil and gas, we just re-read a few earnings transcripts and present some observations below. Key topics this note:
- Land Driller messaging is consistent. Stabilizing.
- Well Service Hours Moving Up
- BKR U.S. Land Rig Count – Down only 2 rigs on Friday
- Frac Crew Count – We peg the U.S. count between 85-90 fleets.
- Southeast Texas Driving Observations
- Daniel Energy Partners Permian Basin BBQ Cook-Off Update
- 2021 Subscription Package Info Forthcoming
Patterson-UTI / Precision Drilling Conference Call Takeaways. Two key themes jumped out to us. First, an expectation for stability/modest improvement and second, recent technology and efficiency improvements. With respect to activity, PTEN guided its Q3 average rig count to 59 rigs, the same level it was working at the time of its call. In Q2, PTEN averaged 82 rigs. PDS meanwhile noted it is running 23 rigs in the U.S. today, up from a bottom of 20 rigs. Good news is PDS sees its rig count trending upwards to 30 working rigs in Q4. PTEN does not give guidance beyond one quarter, thus no specificity from them on a potential Q4 trajectory. Trying to extrapolate one company’s data point is not always the best analytical process, but humor us for a moment. Should PDS see its working rig count increase from 23 to 30 rigs, that’s a ~30% improvement. The BKR U.S. land rig count last week totaled 239 rigs. If the PDS comments are reflective of an entire industry, a 30% increase to the U.S. rig count equates to ~308 working rigs. For those who regularly read our notes, we have reported multiple activity outlook anecdotes from private land drillers. These anecdotes suggest a respectable rig count recovery could unfold. At a minimum, there is a decent level of rig inquiries. Recall, Bakken/PRB contacts in early June noted an expectation for a decent Q1’21 uptick. An Eagle Ford/East Texas driller cited small, but incremental opportunities from multiple E&P’s. Now, we totally get that the market is volatile and no one’s crystal ball in oil service is really that good. We also recognized the danger in cherry picking one good anecdote. However, we do try to gather as many data points as possible and then using the mosaic theory, we guess what may happen. On that point our current U.S. land rig forecast, which we presented on June 19th, calls for an average Q4’20 rig count of 271 rigs and a Q1’21 rig count of 371. Honestly, our Q1’21 forecast feels a tad generous, but the PDS comments, if applied to the entire industry, make us feel a bit better about our original prophesy. As aside, we model a 238 rig count average in Q3 essentially flat from where we are today.
Efficiency gains continue to be a highlight. PTEN presented two on its call – one for frac and one for drilling. On the frac side, PTEN noted one fleet pumped 23 stages in 24 hours and in a 31 day period, the fleet completed 440 stages (~14/day). The company did not call out the location of this fleet, but we suspect it was in the Permian. In its drilling division, the company cited a recent well which employed the use of a PTEN rig, its directional services as well as its tools and technology. Management described this well as a 10,000 foot lateral where the horizontal section was drilled in the shape of a U. Pretty cool. The design and success did not require any high cost rotary steerable systems. PTEN did not elaborate on the cost of this well, but when one considers the technology brought to bear on this well, it’s a good example why the traditional dayrate discussion is somewhat irrelevant for fully-integrated land drillers such as PTEN and a few of its peers.
PDS also highlighted its technology advances. Notably, the company gave a shout out to its AlphaAnalytics trials which is being run in the Permian and the Haynesville with two multi-rig clients. In the Permian trial, the company’s customer had a 28-day well plan, but PDS delivered drilling times just under 24 days. Meanwhile, in the Hayneville, PDS averaged an 8% well savings cutting drilling times by just over 2 days. The technology allows PDS to assess process and drilling operational improvements and deliver them real-time to the client.
Something to consider. Trying to gauge industry adoption rates of new technology makes modeling very difficult. Most pressure pumping utilization templates are driven by two key variables: rig count and stages/day. With land drillers seemingly always finding ways to trim drilling times, the magnitude of rig count additions comes into question (more wells/rig drains an E&P budget, thus less rigs unless the E&P spends more). Ditto pressure pumping. With new equipment and well designs allowing simul-ops or reducing downtime between stages, the true need for frac crews becomes difficult to predict. In our model, if you increase the number of stages completed per day, the math then leads to faster completion times and in theory, less crews needed. While we want efficiency gains to make U.S. shale cost competitive, the risk is faster drilling/completion times means more wells with less rigs. If completion times come down, so too does the call on frac crews. Simplistically, this means the current oversaturation of OFS equipment will persist. Therefore, with this backdrop, we believe it is yet another reason why the OFS sector needs to consolidate and rationalize costs. At the same time, well capitalized companies who can invest properly in R&D will further solidify themselves as the long-term winners.
Ranger Energy Services Thoughts. Activity comments are consistent with our recent notes. The company noted its well service activity is up 40% from its trough while 24-hour rig work is now 10% of its active rigs vs. 3% at the trough. In its wireline segment, the company is now running 6 units. It averaged 11 trucks in Q1, but troughed at 4 units.
OFS Capex Consideration. PTEN’s 2020 capex budget is $140M. PDS capex budget is $48M. Through the first six months, PTEN has spent $122M, leaving $18M to be spent. Meanwhile, PDS spent $35M through the first six months, leaving $13M left to be spent. Capex requirements go down when nothing is working, but the current levels being spent by PTEN and PDS reflect the survival mode of the industry. These are two good companies so their dramatic drop off in spending is noteworthy. It’s also not a good omen for capital equipment providers.
Interesting New Product Design. In an effort to squeeze in one last tour before vacation, we spent Friday morning with the team at Sun Coast Resources. An interesting story and one we’ll dig into in detail in the coming days. The purpose of this tour was to learn more about their new fuel distribution system. Why? As most readers know, fuel delivery is every bit as important as sand and chemical deliveries. Without fuel, you don’t frac. We actually knew this before the tour. It’s not rocket science. But we never gave much thought to how a sector such as fuel delivery also works to make the completion process run as smoothly and safely as possible. In the case of Sun Coast Resources, its new fuel distribution system was introduced in Q4’19 and is now gaining traction. The system reduces the number of personnel on location, adds safety and environmental benefits and helps reduce rig-up and rig-down time. This saves the customer money which is what intrigues us. Interestingly, participating on our tour via Zoom was a high quality Permian E&P while the list of participants for upcoming tours includes the who’s who of E&P and frac. Now, we will dig deeper into the Sun Coast system later this week and better explain its advantages and nuances. We simply make an mention of it now given the efficiency themes/takeaways from the PDS and PTEN calls. It was a timely tour and we would like the hospitality of the Sun Coast team.
Southeast Texas Driving Observations. Sometimes we are too critical and that gets us into trouble with some of our sensitive readers. But critical messages, we submit, occasionally need to be heard. Last week we conveyed our views on potential changes to well service derrick certifications (i.e. extend certification time line requirements to save money, in our view). A part of our concern surrounds the inability for the service industry to make the appropriate investments in safety due to insufficient cash flow and margins. Obviously, we know service companies would prefer not to take short cuts and obviously, the E&P customer doesn’t want safety short-cuts either. Having an accident on location is not good PR or good business even if you are indemnified. But, short cuts do happen, particularly in cash flow constrained environments such as today. The substantial majority of our industry contacts are all strong believers in safety and it’s probably a fair statement to say all of us want to make sure everyone goes home safely. But sometimes people do really dumb things and sometimes there’s nothing the best safety protocols can prevent. Case in point, this weekend we were on Highway 90, a two lane road between Liberty and Beaumont. We were behind a tractor trailer owned by a privately-held vacuum truck company. It was raining relatively hard, perhaps a function of being in the outer bands of Hurricane Hanna. The truck driver ahead of us must have been in a hurry because he passed a slower moving vehicle. To be fair, we were in a legal passing zone, but think about the situation. Heavy rain, slick roads, a vacuum truck and a passenger vehicle. Not a good combo. Thankfully, no incident occurred. We presume the owner of that company would not embrace the driving practices of its driver. And, we would bet the vacuum truck company isn’t making much money right now as most of the businesses in the Dayton, Liberty area appeared to have shut doors at local facilities (we passed by three closed facilities along the way). Admittedly, this is a one-off observation and probably doesn’t fall within the realm of research, but one can only imagine an accident with a vacuum truck and a passenger vehicle. Safe to say it wouldn’t end well. Moreover, the cost of any settlement would almost certainly wipe out that company’s entire profitability this year.
BKR U.S. Land Rig Count. Declined two rigs to 239. No major basin changes which makes sense when the decline is a meager two rigs.
Frac Crew Count. Our working view of the U.S. frac crew count is ~85-90 fleets, of which the majority ~40-42 are in the Permian. We thank our industry friends who help us gather this information. We are in the camp the U.S. count troughed in the ~50 range.
Traffic. Another one-off, one-day anecdote, but I-10 traffic from Houston to Seaside stunk, particularly around the Mobile, Alabama area where we averaged between 20-30mph. The Buc-ee’s just east of Mobile was standing room only while fast food drive through’s in the Gulf Shores area had lines stretching into the street. We stopped at one exit and had to get back on the highway as the lines at Cane’s and Chick-Fil-A were oppressive. Don’t criticize our food choices. We first stopped at Cracker Barrel to get a healthy serving of pancakes and bacon, but were told it was a 45 minute wait. We eventually found a Five Guys about 10 miles away – only a fifteen minute wait there. Point is – lots of people out and enjoying their summer and clearly no one is concerned about their diet. Fortunately, while elective surgeries are down due to COVID, there’s a big backlog of heart bypass opportunities developing in the Gulf Shores region. Also, one would think gasoline consumption should be pretty good as well.
DEP 2020 Permian Basin BBQ Cook-Off. Not looking good. We had planned to hold the event on September 30th. Given the COVID uncertainty, we had held off on making a formal announcement of the event. We are now pushing the event back to November, but admittedly even November is probably a long-shot as well. We’ll decide soon, but if forced to cancel altogether, we will do it in 2021. To make up for this, Daniel Energy Partners plans to drive the company smoker to Midland in late September/early October. We’ll take up residence at the Hampton Inn and will try to cook for a few companies while in town. Still trying to get the blessing from the boss, so no firm dates yet. That said, if you would be willing to allow me to bring a pit to your yard (and perhaps store it for a couple days while I cook in the area), let me know. Happy to cook for your customers and industry friends.
2021 DEP Subscription Packages. We are now starting to rollout out our 2021 subscription packages. Why now? To get ahead of the 2021 budget process in the hopes you can squeeze DEP in next year. Therefore, most of you should be on the lookout for an individualized note from us post Q2 earnings season. Some have already received it. To the extent you can support our business, you rock. If not, no worries, but as we conveyed in a note a few weeks back, we will begin pulling non-subscribers from our events and research distribution lists at the end of Q3. We don’t do this to be mean, but giving away one’s work product for free is bad business. We hope you understand.
One final point, we’ll post our 2021 events agenda in an upcoming note. Needless to say, we have a lot of good things in the planning process. We think you’ll want to be included. We will march forward with our events next year. Life must go on.
Be safe out there.
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