DEP Upcoming Events. We will host a reception in Midland on June 10th. Email us if interested. Members of the DEP team will be in Denver on June 16-17th. Let us know if we can buy you coffee or beer. We prefer the latter. Also, the DEP OKC Steak & Baseball outing will be July 6th. Again, email the DEP team if interested, but note there are limited seats to this one and clients receive priority.
Recent Auction Activity: Quick travels to Bossier City this past week to attend the Superior Energy Auctioneers auction. Yes, we could have listened online, but it’s much more fun to attend in person. This way we get to visit with the Superior team and listen to their real-time observations. The Bossier City auction’s highlight featured the liquidation of 34 pump down units which had previously been owned by S3 Pump Services. First, we would like to thank the Superior team for their hospitality. It takes patience to listen to our sometimes uninformed questions. Second, we’ve been to auctions many times over our career. It is safe to say the influence of internet bidding is clearly impacting in-person attendance as audiences have diminished in size in recent years. Yes, COVID is a factor as could be the current OFS doldrums, but watching the callers, it would seem more bids came from the internet as opposed to the in-person audience. By our quick tally, we estimate nearly 30 people attended the in-person session, but according to auction contacts, internet interest preceding the auction was high. As for pricing, bids on the pump-down units ranged from a low of $65,000 to a high of $255,000. Most of the units sold for less than ~$100,000. By comparison, newbuild prices for pump-down units are closer to $1.2M, although one smart wireline contact who also owns pump down units reports his purchase price in 2018 was just over $1.3M. Differences in equipment valuations were typically a function of the unit’s age as well as engine life and the engine/transmission set up. Many of units were sold to a buyer in Kazakhstan with internet buyers being located in Texas, Oklahoma and Mississippi. We didn’t recognize any of the buyers attending the auction as none wore corporate swag.
At the auction, we spoke to a well service rig builder who claims he has sold four new rigs this year. All of the rigs are 104’ masts or greater and will be used to replace older rigs. According to this builder, buyers of rigs claim E&P end-users are purportedly becoming a bit more focused/concerned on the quality of the equipment. Makes sense as much of the U.S. well service sector’s equipment is old. We are in the process of a well service update which we hope to publish next Sunday night. Look for more workover observations then.
U.S. Well Services – Electrification Focus: Not a huge surprise, but USWS announced this week plans to sell its diesel frac assets. We say not a surprise as the company’s management team stated on the Q1 call a desire to be all electric. The only way this would happen would be via a sale of the company’s legacy equipment. The sale will include ~9 diesel fleets, of which ~5-6 are active. The assets will be sold to multiple buyers. In addition, USWS noted select power generation assets may also be sold as part of this process.
Per an 8K filing on Friday, the first buyer is Alamo Pressure Pumping. The 8K notes Alamo will pay $21M, but does not disclose how much horsepower this will entail. We suspect Alamo is likely buying ~2 fleets as USWS operated 5 fleets in the Permian, of which we believe 3 were electric. As for the other buyers, we don’t know yet. If not mistaken, USWS has three active diesel fleets in the Eagle Ford along with one active diesel fleet in the Marcellus. The remaining three diesel fleets, we believe, are stacked. The potential sale of the Eagle Ford assets is noteworthy as we estimate USWS operates 3 of the region’s 28 active fleets. This could represent a nice consolidation play if the buyer of the assets is one of the larger EF operators (i.e. NEX, FTSI or LBRT – we think those three collectively have ~12 active EF fleets). We doubt HAL is a buyer given the USWS lawsuit against HAL, nor do we envision privately-held all-electric player Evolution would be a buyer. As we noted in a prior weekly epistle, there are two start-ups with home bases in the Eagle Ford – we’re just not sure if they have the capital to pick up three fleets (assuming it’s a package sale).
Final USWS thought. We are encouraged by the USWS announcement as we see it as a consolidation play (assuming, of course, no new start-up’s buy the assets). In the case of the assets sold to Alamo, we believe those two USWS fleets were most likely spot, not dedicated. Consequently, the fleets would have been more active participants in the RFP/bidding process. Now, in theory, there is one less participant in Permian RFP processes, a good thing for the Permian frac market. Second, look for USWS to fix the balance sheet – not an original thought as the company stated in the release this would be an outcome of the sale. In time though, USWS will likely prosecute further electric fleet expansion. Remember on the Q1 call, management highlighted continued customer interest in electrification while USWS also recently announced its new eFleet design – the Nyx Clean Fleet Pump. It would seem logical USWS will spend cash to build what was advertised as a $23M fleet. Last bloviation and this is not meant to be a stock opinion, but we wonder how the investment community will look at USWS as it transitions to a fully electric fleet. In the short-term, we think the lack of liquidity and leverage is a hinderance, but it will be interesting to see if, in time, an all-electric player commands any form of ESG premium to those who operate legacy fleets.
BKR U.S. Land Rig Count. Another small gain, +2 rigs w/w to 442. +2 Permian / +1 Eagle Ford with small losses in Marcellus/DJ.
Permian Basin BBQ Cook-Off – September 30th. Our event sponsorship brochure will be circulated this week with a formal registration process to kick-off shortly thereafter. Presently, we have 48 committed cooking teams. We will sign up an additional six, plus there will be some spots for companies not wishing to formally compete. Further, we’ll have an area for equipment displays as well. Quick reminder – this invite-only event will be for DEP clients and friends, event sponsors and guests of our sponsors. The BBQ should attract executives from not just the OFS/Cap Equip space, but also the E&P sector as well – thus a good time to see friends and customers. Finally, this year the event will raise money for charity. DEP commits to donate a minimum of $25,000 to the winning cooking teams’ charity of choice. In addition, DEP will be making other donations to local Permian organizations.
DEP Editorial Opinion: Since our inception last April, we have made multiple references to the ongoing unwind of the oil service sell-side business model. This diminution of the research community persists as we have seen two bulge bracket firms suspend/drop coverage of the oil service sector during the past four weeks (Wells Fargo/Credit Suisse). This follows recent departures of senior OFS analysts from JP Morgan and Goldman Sachs. There can be no doubt regarding the demise of the oilfield service sell-side, a function of diminished investor interest, limited OFS capital markets activity as well as reduced fees from essentially absent OFS M&A. These factors packaged together necessitate the need for investment banks to cut costs, thus goodbye senior analysts – whether they be fired or they simply leave to pursue other more stable opportunities. So, what does this mean? First, the traditional OFS research model needs to change, hence the formation of Daniel Energy Partners and our somewhat unconventional business model. Research providers who wish to enjoy a sustainable business practice require not just buyside financial support, but also the support of the industry. At DEP, we are blessed to have ~90 formal upstream-related subscribers while our penetration of buyside accounts has just started. Second, if financial service providers can’t afford to keep top research talent, will they still invest consequential dollars in future energy/investor conferences? We don’t think so. Further, with so many financial institutions becoming “woke”, we wonder if they would even want to have a dedicated “traditional” energy conference with their name associated with it. Frankly, we doubt it. At DEP, however, we have no shame or guilt with our association with the upstream energy sector. In fact, we enjoy it. Why? Simple, it’s a people business and it’s fun, notwithstanding the sector’s volatility. Also, we fully recognize oil and natural gas aren’t going away during our professional career, thus we choose to support it vs. run away as some of our banking friends have recently done. Why point this out again? Simple. First, shameful self-promotion. Second, we call on our industry friends to support the remaining OFS sell-side community, many of whom are really good folks (i.e. Lemoine, O’Leary, Burke, Mulvehill and MacPherson). We don’t need these last remaining analysts go the way of others because at some point the sector will improve; investment dollars will return and we’ll need all hands on deck (we believe investors ultimately value returns/profits/stock performance which means they’ll chase returns and rationalize investment decisions). Should our prophesy play out, the buyside will need research providers to lean on . This means companies won’t want some 25-year old kid trying to walk prospective buyside clients through the virtues of their business.
Final Thought. We hope everyone had a relaxing Memorial Day weekend. Take some time to read memorials and reflect on the heroes who served our country. That’s way more important than our weekly note.