We have returned once again from another three day tour in the Permian. This marks our fourth Permian trip in three months, a trend which we hope to continue! The frequency of our field tours provides a decent opportunity to visualize real-time changes in the market, having started our tours right as the market began its collapse, visiting the region again during sub-$20 oil prices and now having had the chance to see the emerging recovery. Our takeaways from this trip, as well as thoughts on news we missed while out of the office, are summarized below.
- Frac crew count rebound accelerating.
- Frac pricing still stinks.
- Land rig activity slips again, but stabilizing.
- Service companies hiring again.
- Well productivity – mixed anecdotes.
- Bankruptcies continue.
- COVID concerns and observations.
- Daniel Energy Partners Update – still chugging along and planning lots of activities.
Frac Crew Growth Quantified. In keeping with prior notes where we have highlighted expectations for improvements in U.S. completion activity, more data points confirm this trend is happening. Specifically, we visited with multiple completion oriented companies as well as E&P’s. At this point, we anticipate at least 25-29 additional fleets being deployed in the Permian before YE’20 (assuming no collapse oil prices). We are also tracking ~7 Permian fleets potentially being deployed in January. The current working Permian fleet count is ~29-30 fleets, thus we see the Permian count reaching ~55-60 crews before year-end. The incremental fleets, we believe, will go to work for 12 public E&P companies and 11 private E&P companies. Some of the fleets are spot, not dedicated work, thus at risk of being released once the jobs are complete. We are also tracking one working fleet which we believe will be dropped by its customer. This fleet, we believe, had been under contract.
In other basins, we learned of another fleet going to work in the Bakken while a Marcellus/Utica contact reports there are 19 fleets operating in that region with potentially 3-6 going to work in 2H’20. The range is wide because some of the work is project specific, thus likely short-term. The contact also sees one of the working 19 crews being released, thus net growth of ~2-5 fleets. As a reminder, when we were in East Texas a few weeks ago, we reported E&P plans to add ~7-8 crews. We’ll be heading back up there soon to check on the status of these deployments.
Totaling up our field anecdotes and recognizing we have not fully canvassed all basins, it seems reasonable to see the U.S. frac crew count rising by another ~40 fleets before YE’20. This would take the industry to ~110-120 fleets. Also, a few things to remember: (1) these growth plans are based on a $40+ WTI price; and (2) the growth is biased higher as we haven’t canvassed all basins. One thing to consider, even though our Permian count is relatively thorough, we admit an inability to query all E&P’s, thus a potential upwards bias to the count. Finally, for those who like to make bold claims they know the exact frac crew count on any given day, we are sorry to report, you really don’t (and neither do we). The working fleets change daily. Example – there is a fleet which went to work on July 4th while we learned of two fleets which started up while we were in Midland. We guess as most others do, but we try to speak to as many contacts as possible before we throw out our numbers. Having support helps. We also see more value in a forward-look as opposed to a historical-look. Think of it this way, don’t you want to know who will pick up work as opposed to who did? Who did doesn’t help you if you didn’t get the job. Some might say this is one of the values of good market intelligence.
Frac Pricing. Pretty awful still and likely to stay that way based on commentary about recent leading edge winning bids. Case in point, one contact acknowledged it had bid and won work at an annualized EBITDA/fleet under $1.0M. That doesn’t cover maintenance capex and gives you no room for error. We appreciate the desire to get equipment working again, but this really makes no sense. Yes, we want E&P’s and service companies to forever live in harmony, but c’mon guys – don’t price your service this low. Remember, depreciation is a real expense, so too is interest as most frac companies have debt. In other words, don’t be fixated on EBITDA.
E&P’s, sometimes you are just as bad as the service companies. We heard one anecdote which sent us apoplectic. A leading E&P purportedly puts out a bid and in this RFP, the supply chain placed emphasis on service company balance sheet quality as a metric in allocating work. At least that’s what they said. Yet, when the work was awarded, it went to a distressed service company while those bidders with strong-to-pristine balance sheets lost out. E&P rationale – it elected to allocate the work based on price. We’ll assume (i) this anecdote is 100% true; (ii) it’s not simply the venting of a disgruntled competitor who lost the bid; and (iii) it further assumes operational efficiency metrics across the bidders were equivalent. These are important assumptions. Based on this, what offends us is the façade of pretending to analyze the service companies if the intent all along was to award work to the lowest price provider. That’s not right and BTW – it goes against one of this E&P’s core values.
Other Service Pricing. We chatted with a well service contact who reports rig rates in the $215-$225/hour range. That’s without add-on’s. The company’s price ahead of the recent downturn was closer to $250/hour. Rates are not expected to change despite more work on the calendar. The market remains too competitive and fragmented. Wage rates for this company have been slashed by about 20%.
Frac sand pricing is also discouraging. A local contact reports a recent frac sand sale at $4/ton. Hopefully, that’s a one-off, but recent sand bankruptcies are evidence of lousy pricing, a function of too much capacity and reduced volumes. An informed sand contact reports leading edge pricing is closer to $8-$10/ton. That’s still pretty bad. If we’re not mistaken, operating costs are about that same level.
Land Rig Activity: Still choppy. We heard of two E&P’s likely to drop rigs while a private operator shared plans to add two rigs. Another E&P is developing its playbook now. The current plan is to reduce rigs in December, but should oil prices firm, it has another plan which would keep those rigs working and potentially add two more in Q1. The decision on what to do has yet to be made. As a reminder, the DEP rig count forecast is a bit aggressive as we assume a healthy Q1’21 jump. The modeled quarterly trajectory of 238 rigs (Q3); 271 rigs (Q4) and 371 rigs in Q1’21 feels generous based on the discussions we had in Midland. Nevertheless, we will stick with our forecast for now as we are hopeful that visibility for a COVID resolution will be evident by Q4 thus potentially lifting animal spirits and commodity prices just as the normal budgeting cycle begins. Our forecast implicitly assumes Saudi will continue to exercise its rational guardianship while we are also assuming a Trump victory (we ignore polls at this point). Not trying to get political, but if Biden wins, we wonder if Iran sanctions get eased, thus more oil supply hitting the market. Moreover, some might say those on his ticket won’t be energy friendly. We would likely revisit our forecast in that scenario.
This past week the BKR U.S. land rig count fell another three rigs to 251. Thankfully the rate of decline is slowing, but we are still down 68% from the Q1’20 peak. For the quarter, the BKR rig count declined 52% q/q. The most pronounced decline was in the Bakken and Eagle Ford, both down about 60% q/q.
Service Companies Hiring. Several companies on our tour are now hiring. In some cases, these are re-hires. In other cases, furloughed employees are being brought back. A key challenge reported by three contacts is the elevated unemployment compensation which is keeping some former employees from returning to work. Apparently the delta in wages vs. the unemployment comp isn’t sufficient enough to entice some people back. Also contributing to the problem is the inability for service companies to guarantee more than 40 hours to employees. The overtime pay was the real kicker for the hands, but low service pricing and improving, but still spotty work, prevents the ability to pay overtime.
E&P Well Performance: Mixed views on well productivity post return to production. One private E&P shared its production rates. Wells returning to production saw higher production than prior to the shut-in’s. This E&P expressed a negative view on oil prices, in part based on its own well performance. To the extent other E&P’s experience similar high productivity, the contact believes better-than-expected production could surprise the market, a potential negative to a bullish oil macro thesis. On the other hand, another private E&P reports the complete opposite. Yes, production after the first few days on line was higher than anticipated, but after several weeks, the wells are now producing 10% less today than prior to the shut-in. This E&P, while disappointed in its production, sees this as bullish oil. Like anything in the oilfield, everything is nuanced, thus we don’t jump to conclusions on a sample size this small. That said, the comments are interesting, thus the reason for inclusion in this note.
Bankruptcies Continue: Another OFS enterprise plans to restructure. This past week Covia (old Fairmount/Unimin) elected to take the plunge. This marks the third sand player in recent weeks to press forward with a restructuring as Covia filed Chapter 11. Our hope is the newly equitized owners of the restructured enterprises – whether it be Covia or any of the other restructured (or soon to be restructured) firms – realize that there’s no hope for this industry barring consequential consolidation. In our view, an industry which remains fragmented and whose customer base remains under the gauntlet of capital discipline will fail to earn a decent return even if debt is wiped away. Special situation lenders who now become equitized should look at the recent failures during the 2015-2016 restructuring boom and realize that just because an enterprise is debt free does not mean that prosperity resides just around the corner. Realize the fundamentals underlying most OFS investments are terrible and simply hoping to get bailed out by a higher commodity price is foolish thinking. Rather, put companies together, eliminate duplicate overhead and raise prices.
COVID Observations. Multiple companies now report employees who have contracted the virus. The cases, thus far, have been minor with many being asymptomatic. Virtually all the companies with whom we visited are not operating at full capacity. Service companies are generally allowing guests in the office, but E&P contacts are not. In fact, our E&P meetings were held off-site. The Permian, like most oilfield towns, is comprised of tough people, but on this trip, the mask wearing was more pronounced (at least in public). Some OFS executives are nervous a further spread of the virus could lead customers to delay going back to work. No evidence this has happened yet. Our E&P friends seemed to think the only way COVID would impact field activity would be if COVID concerns created another sell-off in oil.
In the category of for what it’s worth – we visited with two contacts who have had relatives die recently. Their deaths were classified as COVID-deaths. In one case, the contact’s father-in-law contracted COVID at a nursing home. He was 90 years old and in poor health. This individual tested positive, but showed no symptoms. When the individual passed away, he was nonetheless classified as a COVID death. Interestingly, the contact says the father-in-law died at the nursing home, but the death was classified as dying in the hospital. In the second case, an individual’s grandmother passed away at the age of 89. She had contracted COVID but then tested negative. She was subsequently released from the hospital, but died a few days later. Again, the death was classified as COVID. Now, we fully recognize COVID can be serious and it’s a virus we certainly don’t wish to catch, but these anecdotes come directly from family members, thus no reason for them to lie. And while it’s a sample size of two, it does make one wonder about the veracity of COVID death reporting. How many people have died, but for whatever reason, the hospital and reporting authorities elect to call it COVID when, in fact, the death might not have been COVID at all? On the other hand, there was a good interview on Fox News on Friday with Dr. Bill Fisher (former astronaut) and his daughter Kristin, who’s an anchor on Fox News. He’s an ER doctor in Houston and his comments about COVID victims and lack of ICU beds in Houston is sobering.
Daniel Energy Partners Update. We are now three months into our entrepreneurial voyage. Headcount is up 100% during the past month; the DEP paying subscriber list is quickly growing; our LinkedIn presence is not too shabby with ~2,725 followers; and numerous field tours are already under our belt. Meanwhile our industry networking presence/events are also underway, having just held a small, outdoor reception in Midland this past week; our golf outing last month as well as sponsoring multiple industry group dinners and lunches. The fun has only begun. In the coming weeks, we will hit the road again, visiting with contacts and hosting small industry get togethers. In addition, we are praying the COVID crisis moderates so that the Daniel Energy Partners Permian Basin BBQ Cook-Off can proceed in late September. Plus, the next Daniel Energy Partners Houston Golf Outing is tentatively on the books for October 14th, so no shortage of events on the horizon. We will send out event specifics in the coming weeks.
At Daniel Energy Partners, we are long-term planners, so our 2021 events will soon be locked down. Some events expected to be on the docket include:
- The Inaugural Houston Energy Symposium (Q1);
- The Houston Energy Innovation and Perspectives Day (Q2);
- The London Energy Day (June 2021);
- Multiple events targeting our E&P supply chain subscribers;
- The Kingwood Semi-Annual Golf Outing; and
- The Daniel Energy Partners Permian Basin BBQ Cook-Off.
These networking events, some of which are still in the planning process, should be great venues for business development, a key benefit to the Daniel Energy Partners’ subscriber base. For those companies wishing more exposure, we welcome sponsorship positions and/or the ability to co-host events. Frankly, we believe our events will be as good, if not better, than many of the other industry trade shows and conferences. If you have interest in sponsoring/partnering, let’s chat.
In concert with our 2021 planning, we will also be rolling out our 2021 subscription plan and package options. We expect to send this out in August. Our pitch is pretty simple. If you (i) enjoy our research notes and (ii) enjoy attending events with your customers and peers because you believe in the value of networking and business development; then consider subscribing.
Why the pitch now? First, subscriptions are how we make our income and we have two kids heading off to expensive colleges next month. Second, nothing in life is free. Therefore, we respectfully ask for your support. If you don’t care for our research notes and/or prefer not to participate in our networking events, that’s ok – we still like you, but in fairness to those companies who do pay us, we’ll have to remove non-subscribers from our distribution and events list. The effective date of this transition will be September 30th.
At DEP, we strive to provide the most frequent in-basin research you can trust. We know of no other research team who regularly drives across the country to visit field locations in order to see what’s really going on. We are not NYC-based or London-based, rather we live in Texas. We don’t rely on Zoom. Instead, we visit you at your yard or office as frequently as possible. Our customers are industry players, not annoying hedge fund analysts. We don’t care about the quarter, rather we care about the industry and the people who support this industry. To do our job, we leverage our vast rolodex across the entire upstream sector as a means to gain unique insight into emerging industry trends in the U.S. marketplace. These relationships further allow us to make corporate development introductions to subscribers, as necessary, while our industry experience (along with that of our Executive Advisory committee) can also be used to assist with any consulting projects you may have. Meanwhile, our frequent field and factory tours often provide us first look at new technologies and/or emerging companies. When we find these, we write about them because we want to educate our sizeable readership audience. Finally, our industry events – which are growing – are fantastic venues for you to interact with your peers, vendors, customers and in time, investors. We believe the collective package of research, events and marketing have value, a key reason we launched DEP (plus we were ready to be our own boss).
Obviously, we fully appreciate strapped G&A budgets due to the crappy market, but we also appreciate the value of trustworthy market intelligence and the importance of targeted marketing opportunities. As you consider the balance of 2020 and look forward to 2021, we hope to earn your respect and business. For those who are able and willing to support Daniel Energy Partners, we will do everything we can to support you in return. For those who have already stepped up and subscribed, we thank you for helping DEP get launched.