A quiet week on the news front, so the DEP team used the downtime to conduct another equipment tour – this time visiting the new HAL Zeus Pump.  Below, we summarize our equipment impressions as well as bloviate on our take on the eventual industry transition to electric frac.  Also, some encouraging news as the land rig count gained another 5 rigs this week – we’ve now seen gains in 29 of the past 30 weeks.  Meanwhile, with another quiet news outlook anticipated this week, the DEP team will divide and conquer as research will head north to the Bakken while the corporate development team will slave away with Permian Basin BBQ Cook-Off planning.  For those companies who are waiting for the sponsorship brochure, give us a couple more weeks and we’ll circulate.

Zeus Pump Observations:  HAL’s presence in the electric frac market is real as exemplified by the rollout of its Zeus pump technology.  Yes, the company’s foray into electric frac kicked off nearly five years ago, but a step-change developed with the company’s updated Zeus solution. The pump, which is rated for 5,000HP (hydraulic), features two Q10 pumps, a noteworthy consideration given the Q10’s years of proven field success.  Moreover, the Zeus electric platform is designed to eliminate any power loss as field trials prove the pump’s ability to deliver its stated 5,000HP claim.  Based on discussions with E&P contacts, several claim some of the other electric/power-end solutions experience a de-rating such that the advertised pumping horsepower per unit is not fully achieved.  This occurs as power is lost through the engine, transmission and/or gearbox, depending on the power source (please forgive our non-engineering explanation – we’re not that smart).  According to these contacts, a benefit of Zeus’ full power delivery is the advertised footprint savings can be more easily achieved.  Simple example, but assume a trailer solution with a name plate 5,000HP power end solution de-rates to ~3,500HP due to power loss.  This means more trailers will be needed to achieve a similar HP achieved by a 5,000HP trailer which does not de-rate (i.e. Zeus).  This footprint benefit, according to some, is a key consideration for simulfrac operations.  Further, the ability to drive higher the barrels pumped per minute is also a central consideration.

With respect to footprint, HAL’s Zeus fleet consists of 8 Zeus pump trailers which have a footprint of 4,358 square feet vs. the conventional footprint of 20 legacy pumps at 6,560 square feet.  This is a ~34% reduction in space requirements by the wellhead.  The trailer is fully-electric, advertising significant CO2 emission reductions relative to legacy Tier 2 solutions.  HAL further contends the emissions benefits of Zeus are below the Tier 4 engine solutions.  Meanwhile, the electric benefit means no diesel is consumed, a significant cost savings to the customer while rig-up times are reduced due to less connections/hoses associated with the Zeus/manifold design.  Finally, we note Zeus can be paired up with HAL’s electric blender, its electric E-Winch and its electric tech command center thereby making this a fully electric package.

Our Zeus-related questions centered around the operations of the pump, not its outlook/demand, so none of that commentary is in tonight’s note.  We’ll leave guidance with HAL management to convey to the broader industry/investment community at the appropriate time.  That said, customer feedback of the technology is positive thus far.

As for electric expansion, HAL is not alone with its pursuit of an electric solution.  That shouldn’t come as a revelation to any industry observers or regular readers of our notes.  Remember, Evolution and USWS are already long-established electric frac providers.  NEX is testing the NOV Ideal eFrac solution.  LBRT is developing digiFrac, which based on recent LinkedIn posts, indicates the pump is on the test stand now and presumably should soon be in the field.  PUMP, meanwhile, operates its DuraStim technology while BJ Energy Solutions operates its Titan technology (not electric per se, but employs a turbine power solution).  Other private frac companies we believe are evaluating new solutions as well so the universe of players offering an electric platform is likely to grow.  There are also other equipment packagers delving into electric as well.  Similar to last week’s profile of two new OFS products, our comments on HAL are not an endorsement.  That’s up to HAL to prove and the customer to decide.  Rather, we are simply conveying a new solution to readers and we are thankful for the time to visit and learn about their equipment.

Timing of Electric Fleet Adoption:  E&P demand for emission friendly frac equipment is not in question.  Rather, it is the speed of adoption associated with this technology.  The central issue remains the cost to build and the attendant returns on investment to the frac provider.  Yes, several well capitalized pressure pumping players have the balance sheet necessary to support new generation equipment, but just as the public E&P universe is expected to live in an era of capital discipline, so too are the oil service companies.  Therefore, until oil service pricing moves higher and/or until such time E&P’s provide contractual support to fund new equipment capex, the process of electric fleet expansion may be a labored affair.  This point was hammered home to us during recent E&P updates.  First, E&P contacts at public enterprises note internal pressure to reduce emissions is key.  Unfortunately, so too is the need to minimize well costs.  In many cases, lower well costs still trump lower emissions; therefore, many E&P’s are opting for perceived less expensive solutions such as dual fuel engine technology.  But why focus on lower well costs and not lower emissions?  In our view, this is an investor-driven issue.  Today, we submit the average energy investor is more concerned about returns and FCF as opposed to one’s emission profile.  Yes, the broader investment community is squarely ESG focused, but that’s not really who’s buying and selling energy stocks.  In fact, the last time we checked, energy weightings remain near all-time lows.

We believe the catalyst which spurs electrification will be growth in simulfrac operations where strong utilization and consistent work could help lift the returns necessary to allow the pressure pumping community to make the electric investment.  Moreover, those companies who have the balance sheet to invest may choose to build proactively in order to capture market share, with hopes pricing nudges higher over time.  Initially such a move could spark investor concern, thus it’s important for frac companies to distinguish between returns on conventional work vs. simulfrac, including the ongoing equipment maintenance capex for those two distinct jobs.  Another thought – we do note some E&P’s continue to express a desire to proceed slowly with the electrification and/or pump upgrade process as the plethora of new technology options means it may be better to test/trial vs. going all-in with one solution.

Simulfrac Observation:  We chatted with a Tier 1 E&P contact about the growing use of simulfracs.  This contact observed the following and stated it was a personal opinion, not a company opinion.  Namely, the contact believes the ultimate rig count to frac crew ratio in the Midland Basin will level out at 7-to-1 for companies who transition solely to simulfrac operations.  Historically, this ratio has been closer to 2.5 to 3.0 rigs per conventional crew.  Simulfracs and the efficiency gains, both in drilling and completion, continue to rise, explaining this individual’s views.  Moreover, because simulfrac operations in the Permian are likely to grow, this contact sees a scenario where the Permian frac crew count actually declines in 2022 (particularly if one views a simulfrac as one and not two frac crews).  Not to say well completions decline as they should rise y/y given WTI is in the mid-$50’s.  For financial modeling nerds, this means a new way to model pressure pumping will be required.  Notably, key questions to frac companies: (1) will you disclose a simulfrac crew as one crew or two and (2) will you provide relative margin performance between conventional vs. simulfrac?  Also, not all basins are ready for simulfrac operations.  One leading Haynesville player and one leading Marcellus/Utica player don’t see a wide adoption to simulfrac anytime soon.  Therefore, evaluating frac companies could get even harder as geographical exposure needs to be considered.  By way of background, industry contacts claim there are ~10 active simulfrac and twin-fleets operating in the Permian, up from mid-single digits during the past 60 days.

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Daniel Energy Partners is pleased to announce the publication of its first market research note. In this note, we reached out to executives across the oil service and E&P sectors to gauge leading edge sentiment.

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