BKR U.S. Land Rig Count was down 8 rigs w/w to 754 rigs.
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DEP Update: Dividing and conquering this week as some members of the team will be driving around the Permian for two days of meetings, including a tour of a mobile sand mine. Other team members will be slaving away in Houston on the Thrive Energy Conference as registration links are now being disseminated. Admittedly, this is a bit of a slow process, but we anticipate all subscribers and sponsors will receive a registration link by next week. If for some reason you don’t receive a link by next Monday afternoon, shoot us an email.
OFS M&A Continues: This week another frac deal closed as ProFrac Services (“ACDC”) announced its fourth pressure pumping acquisition. This time it was Producer Services Corp. (“PSC”), a privately held Ohio-based frac player. PSC has three fleets, of which two, we believe, are in the Northeast with the other in the Hennessey, Oklahoma area (last time we checked) – ACDC reports two are working. The company’s advertised horsepower totals 200,000HP, but we suspect much of this horsepower was built years ago. One reason is the delta in purchase price between ACDC’s other deal, REV Energy Services vs. the price of PSC. The PSC purchase price was ~$35M vs. the $140M price for REV, a business also with three fleets and 204,500HP. This delta, we submit, is a good barometer for managing seller expectations, particularly for those smaller enterprises with legacy horsepower/lower profitability. As a quick reminder, ACDC acquired FTS International, U.S. Well Services, REV Energy Services and Producer Services all within the past year. If our active fleet tallies are directionally correct, the top 5 U.S. frac companies now control ~66% of the U.S. frac market while the top 8 have nearly 80% share. While the competitive structure of the frac industry is improving, most well-functioning oligopolies have three (four max?) dominant participants that control the lion’s share of their respective industries. So, the frac industry, while moving in the right direction, still has some work to do. To this point, the consolidation process, in our view, is not over as there remain several smaller enterprises open to transacting. The question is whether remaining sellers have realistic expectations, particularly as the PSC purchase price might be sticker shock to some potential sellers.
Another consideration – new fleets are continuing to be built, many of which will go into the hands of the top frac companies. What remains to be seen is whether these fleets will go out as incremental or truly be used for replacement purposes. Our current estimate of newbuild fleets stands at 32 with deliveries stretching into 2024 (our newbuild estimate is biased higher). Yes, one can reasonably assume all these new generation fleets should generate better-than-expected utilization and pricing. However, if the rig count flatlines this year (down 8 rigs this week per BKR), the incremental supply is something to pay attention to as not all companies adding capacity intend to use the new fleets as replacements. Here’s the bull case for frac: (1) commodity prices rally; (2) rig count growth expectations conveyed by the public land drillers on Q3 earnings calls materializes, leading to the U.S. rig count moving north of 800 rigs; (3) we see clear evidence of frac attrition, which means the top public companies actually have to report fleet retirements as the small private companies are unlikely to shut down due to attrition; (4) supply chain headaches lead to continued equipment delivery delays and (5) more M&A transpires. Here’s the bear case: (1) rig count is flat-to-down; (2) new equipment deliveries come on time; (3) frac companies seek to maintain market share; (4) new start-up’s manifest themselves (admittedly not many, but we know of one); (5) smaller frac companies add capacity whether via newbuilds or buying/upgrading older equipment. Our view: we are glass-half full, largely a function of our constructive view on oil prices over the medium-to-longer term and our view that M&A is not over, and the supply chain is not quickly fixed.
We will clean up our estimated active fleet tallies by company/region this week and will include in next Sunday’s note.
E&P Thoughts: As earnings approach, our thoughts are turning to budgets. Currently, consensus estimates are for E&Ps to spend 26% more than in 2022 (see table below). As capex budgets are announced, we’ll amend this table.
The New Year kicked off with a bevy of updates, some from Goldman Sachs’ conference in Miami this week.
PXD CEO Scott Sheffield had several revelations:
- The company believes it will add 2 rigs per year going forward (on its Q3 call, it indicated that 2023 capex could be up ~20%, in the $4.5B range).
- Due to a conflagration of inventory issues, too-tight spacing, declining reservoir pressures, and lower overall production from zone co-development, Sheffield expects US shale oil growth of 400 MB/d exit ’22 to exit ’23. He also lowered his long-term Permian Basin forecast from 8 MMB/d to 7 MMB/d by 2030.
- At that time, he believes that only CVX, COP, and PXD have the inventory depth to produce > 1MM B/d.
HES CEO John Hess was more optimistic regarding future shale production.
- Improvements in spacing and completions have given their former Tier 2 locations similar IP 180s and EURs as its Tier 1 wells.
- What gets drilled five years from now will face challenges, but that was also true five years ago.
- He believes the real challenges to growth for the industry are the three ‘I’s: Investor discipline, Inflation, and Inventory life and quality. Still, he believes the US will reach a plateau of 13-13.5 MMB/d.
- Hess did acknowledge that in the near term, Bakken production will likely suffer weather-related impacts, which he will detail on their earnings call.
Hess wasn’t alone in the weather-impact department: OXY, MGY, and DEN all reported that Winter Storm Elliott impacted operations.
- For OXY, Q4 volumes were lowered by 10KBOE/d in the Permian and Rockies.
- MGY lost 4-5 MBOE/d during the quarter, due to weather and a well pad brought online later than anticipated. Production has since recovered to >80 MBOE/d and 2023 guidance remains unchanged.
- DEN lost just more than 1 MBOE/d in the Rocky Mountain and Gulf Coast regions for the quarter. Lost production has since been restored.
PDCE took the opportunity to provide preliminary 2023 guidance:
- Oil and gas capex for 2023 expected to be $1.4B, up ~30% from 2022 levels and ahead of consensus estimates of $1.3B.
- Oil and total production growth for the year will be up 3-5% from 2H 2022 levels.
- PDCE will run 3 rigs in the Wattenberg, with 1 full-time and 1 part-time frac crew (part time crew running Q1 and Q4).
- The company will run 1 rig in the Delaware with 1 part-time frac crew running in 1H ’23.
- Rig/crew counts are unchanged from YE 2022 levels.
- PDCE expects to spend $400-475mm in Q1.
XOM released an 8-K detailing earnings impacts for Q4. Declining oil and natural-gas prices reduced E&P earnings by ~30%. The read-thru for refining was much better, with XOM estimating that lower refining margins had effectively no impact on the company’s results.
OFS Q4 Updates: In connection with the Goldman Sachs Energy Conference, several OFS companies also provided updated guidance. Most notable are updates from Patterson-UTI and Precision Drilling. Patterson-UTI highlighted preliminary results which are coming in much better than Wall Street expectations. Q4 EBITDA was guided to $230M vs. expectations in the low $200M range. Strong results helped PTEN reduce debt by an additional $22M and provided for $57M in share repurchases. Driving the beat was higher pricing and less severe holiday slowdowns. Precision Drilling, meanwhile, provided an update on its debt reduction goals, noting total debt reduction of $106M in 2022 vs. a plan of $75M. Additionally, the company announced the repurchase of ~130,000 shares. Of equal importance is PDS’ activity guidance. For Q4, PDS averaged 66 rigs in Canada and 59 rigs in the U.S. Today, PDS has 74 active Canadian rigs, a level which should reach 80 rigs this Q while in the U.S., the company has 62 active rigs, a level which is expected to increase modestly in the coming quarters.
Social Media Posts: Once again we find we are spending too much time on social media, but sometimes this yields interesting nuggets. Case in point, we couldn’t help but notice a post by an equipment fabricator announcing the recent construction of 20 new Tier 4 DGB frac pumps. Field contacts suggest these pumps will find a home at one of the larger frac entities. Separately, another social media post indicates a new frac entrant may be on the horizon – we’ll provide details in the coming weeks as we gain more color. It is worth noting that some anecdotes we have gleaned/reported on new start-up’s have never materialized, so we aren’t betting the kids college tuition that this one materializes either. Seeing the forest-through-the-trees, we know the vast majority of new fleets are being built by existing frac companies. And, we know that 1-2 fleets from a new entrant likely wouldn’t arrive until 2H’23. Further, 1-2 fleets is trivial when compared to an active U.S. fleet tally in the 275 vicinity.
Refining Thoughts: XOM’s trading statement augurs well for the refiners’ Q4 earnings. PSX also expressed confidence in the business for 2023. The company expects relatively heavy industry turnarounds this year and believes that both gasoline and diesel will be very tight as we move through peak demand in summer. PSX intends to favor distillate production in 2023, given low inventories. As evidence of this heavy industry maintenance, DK announced its 2023 budget of ~$350mm, above consensus estimates of ~$300mm. Most of the delta appears to be increased turnaround spend of $175mm at its Tyler refinery (up from $100mm this year).
Year-end holidays and Elliott created a lot of noise in the final DOE reports of the year (see charts below). Apparent demand for gasoline and distillates dropped precipitously as inventories flirted with the low end of the 5-year average. Refining margins remain elevated, however. Overall, total-complex inventories remain supernormally low when SPR releases are considered.
Product Inventory, Demand, and Margin Charts
(Shaded areas show the 5-year range)
Source for Inventory and Demand Charts: Energy Information Administration
Source for Margin Charts: Bloomberg, LP.
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