DEP Update. Most of the team DEP is shutting down for Thanksgiving Break, so expect a brief note next Sunday. The following week we divide and conquer as half the team will be knee-deep planning our THRIVE 2022 event while the other half heads to NYC and Boston to preach the upstream gospel to clients. Lastly, our working conference agenda for THRIVE is expected to go live after Thanksgiving break. Lots of good speakers committing, so please save the dates: Feb 22-24 at Minute Maid Park.
Safe travels for all our industry friends. We hope you get some well-deserved downtime.
Recent Anecdotes: Members of the DEP team traveled north this past week for meetings in Dallas, Oklahoma City and Tulsa. No major revelations, but a few interesting tidbits.
- Fluid end contacts pushed back on our comment from last week regarding forging prices. As a reminder, we had one contact tell us its forging costs were increasing by ~50%. Other fluid end friends indicate prices are rising, but not to that degree. However, they do agree that forging costs today vs. 2020 are up in the 50% vicinity.
- High input costs such as natural gas are a headwind for some forging companies as utility bills likely grind higher. For forging companies in Europe, the energy cost is a bigger deal. Ultimately, this is one of many factors which will find its way into higher forging prices.
- A private land drilling contact claims it has committed work for multiple additional rigs. The math implies a 15-20% gain in this company’s working fleet.
- Another land driller sees an even bigger percentage increase in its working fleet over the next 1-2 quarters.
- A Texas private frac company claims its hourly pumping charge is now over $10,000 per hour. That’s a big jump relative to the company’s trough pricing when the rate was as low as $6,000 per pumping hour. Current pricing and utilization for this company, combined with a lean overhead, will equate to high single digit and possibly double-digit annualized EBITDA per fleet (for a conventional Tier 2 crew).
- Another frac company claims it implemented a 20% price increase effective January 1st.
- At a dinner round table in OKC, we discussed the outlook for Oklahoma drilling activity. Per BKR, there are 44 rigs drilling in Oklahoma as of Friday. Local contacts contend the demand for incremental rigs in the region could approach ~15-20 rigs. Feels a bit rich, but we’ll see.
- Labor is the number one gripe with service friends.
U.S. Land Rig Count. The BKR U.S. land rig count gained 7 rigs w/w to 546 rigs. The rig count is presently tracking to be up 10-12% q/q. We will update the DEP land rig forecast next Sunday as news flow is likely to be low this week and it will give us something to write about after Thanksgiving dinner.
H&P Earnings. HP announced its fiscal Q4 earnings this week. We highlight several data points below, but there are two key takeaways. First, the company guidance points to continued strong gains in U.S. drilling activity as HP envisions the deployment of another 10-15 rigs between now and year-end. The company is actively working 141 rigs in the U.S., but the mid-point of the guidance implies a ~10% gain from here. More importantly, HP noted visibility for several additional rigs in January. The second highlight is HP’s international commentary which includes (1) an agreement to sell eight rigs to ADNOC as well as its $100M investment into ADNOC’s recent IPO and (2) a healthy uptick in drilling activity in Argentina. Multiple companies alluded to strong international prospects during Q3 earnings season and HP’s specificity, and its ADNOC investment, crystalize the improving opportunity set for those with international exposure. Specifically, HP will see its Argentina rig count rise by 4 rigs.
- HP’s fiscal year end is September 30th. We refer to calendar quarters to simplify our life.
- Calendar Q3 revenue = $344M vs. $332M last quarter.
- North American Solutions gross margin = $69M vs. $75M last quarter.
- Rig reactivation costs totaled $6.6M vs. $5.9M in calendar Q2.
- NAM gross margins expected to improve to $75-$85M this quarter.
- This quarter will be impacted by ~$15M of additional rig reactivation costs.
- Averaged 124 rigs in calendar Q3 vs. 119 rigs in Q2.
- Current U.S. rig count at 141 rigs with the year-end exit rate guided to 152 to 157 rigs.
- Balance sheet remains sound as pro forma debt-to-cap stands at 16%.
- FY’22 capex guided to $250M to $270M vs. FY’21 capex = $82M.
- Nearly 1/3 of the FY’22 capex will be skidding-to-walking conversions.
- 35% of HP rigs are on performance contracts
- HP expects price increases to be more pronounced in the coming months
- R&D spend in FY’22 will be $25M.
Northern Oil & Gas. Announced its 4th M&A deal this year with a sizeable purchase of more Permian non-op properties. This deal, NOG’s largest this year, totaled $407M plus warrants. Pro forma NOG will produce over 70,000 BOE/day with over 40% coming from the Permian and Marcellus. Of note, the transaction enhances cash flow, thus NOG will seek to raise its dividend by 50%. If approved, this would be the third dividend increase this year. Not a stock opinion, but the rapid transformation of NOG from a sleepy Bakken non-op play to a diversified enterprise with improving free cash flow metrics is impressive.