This past week we headed north to Oklahoma to meet industry friends in the Sooner state. This marks our third tour through Oklahoma since the start of DEP in April. While statewide activity levels remain low, there are still lots of people to see and places to go, so we’ll be heading back up there in October. In this note, we summarize trip takeaways as well as our observations after reviewing several company transcripts from the recent Barclay’s energy conference.
New Distribution System Reminder. Last week, we sent out two notes. One via Outlook and one via our new distribution platform. We do this again tonight/tomorrow and a final time next week. After that, we will suspend Outlook emails for our research notes. Be sure to look to see if you receive this exact same note via the new distribution platform – we’ll send it out early tomorrow afternoon. There were some kinks in the first blast as several folks had the note go to their Junk folder. And while some may see our notes as Junk, for those who like them, please reach out to your IT team to make sure DEP is transitioned away from SPAM status. Thank you.
Mid-Con Activity. Remains weak, albeit improved from the May/June lows. The BKR land rig count in Oklahoma stands at 12 rigs as of Friday, up from the low of 9 rigs in June, but well below the 2019 average of 90 rigs and a recent peak of ~140 rigs in January of 2019. Frac activity is similarly rebounding, albeit mildly. We count ~8 active Mid-Con frac crews, although we note some of these crews handle smaller jobs more frequently than the larger fracs. The fleets are spread among seven providers although we learned another fleet will be deployed shortly by an eighth provider. Local contacts report one Oklahoma E&P may soon bring back two rigs with plans to complete DUCs in January. For the most part, however, visibility is opaque at best.
E&P Perspectives. We spent more time behind the wheel as opposed to time in offices, so our sample size of E&P discussions is relatively small, but here are the key takeaways. First, near-term activity for our E&P contacts has either increased QTD or will increase in Q4. One company, for instance, is preparing to bring back two crews in Q4 (for work in another basin). The activity uplift for our contact group follows an essential shutdown of D&C activity earlier this year. The completion uptick is largely a function of completing DUCs. With respect to 2021, no one has a strong view. The recent decline in oil prices creates confusion and comes at a bad time as our E&P contacts are preparing for budget season. To the extent oil prices stabilize in the $35-$40 oil range, the rise in completion activity may reverse as will plans to bring back rigs (at least in the short-term). This sentiment was shared by a frac contact whose customers, most of whom are private, will suspend completion and refrac activity in a sub-$40 market. This company showed us its job calendar which was nicely populated in August, but much less so in September. There is little visibility into Q4 for this company as many of the jobs are short-term spot work, sometimes developing without much lead time.
We had some debate with our E&P contacts over oil service pricing, notably land rig dayrates. The question is whether or not the land drillers will have any pricing power in a mid-400 rig count environment. Our E&P friends seem to think no, but we disagree. Here’s our logic. The rig count will go up when commodity prices improve as there is a growing view that a ~400 rig count is necessary to maintain production. When one considers there is basically nobody drilling today, it is reasonable to see most E&P’s collectively react to higher commodity prices at the exact same time. In other words, our land drilling friends will receive a multitude of calls all around the same time. Now consider this observation. Should the drilling industry stay at depressed levels for a few more quarters, we wonder just how quickly a ramp can materialize. The longer oilfield workers remain out of work, the more likely they find alternate job opportunities. We don’t doubt the industry will eventually find the labor – it always does. We just think the process of finding people might be a tad harder this time around. Therefore, the combination of high inbound call volume and limited readily available capacity will provide the necessary backdrop for drillers to raise rates. Our E&P friends don’t dispute the herd mentality of the business, but they focus on the vast number of idle rigs still parked against the fence and question just how disciplined the industry will really be. Do you focus on market share or returns? We placed our bet (lunch at McDonald’s) on higher pricing.
OFS Perspectives. Hope is fading as most contacts are increasingly concerned about activity prospects in 2021 given the recent sell-off in crude. None of our contacts have any real visibility into next year as most of the businesses we visited are not supported by long-term contracts. Moreover, profitability remains weak. One completions-oriented company has generated negative EBITDA YTD and is slowly bleeding its cash balance lower. A second well service company is running 16% of its rigs. It, however, has positive margins, although the company did sell two old rigs for cash. Meanwhile, the turmoil is showing up with local competing well service companies shutting their doors. For instance, on our last trip to Oklahoma, we drive by a long-time well service company in Chickasha which shut its doors. On this trip we heard of another small player whose rigs will soon go to auction. We believe that company owns about 13 well service rigs. We also visited with three private land drillers. Same story. Utilization is soft with limited visibility.
Frac Crew Counts: Some debate about frac crew counts whilst we were in Oklahoma. Notably, a smart OFS contact claims the count is in the 90’s. The basis for its claim is it supports frac operations in many, but not all markets. We respectfully disagreed over our Mickey Mantle’s steak dinner. That said, we acknowledge the frac crew tallying process is more art than science. First, none of the industry guesstimators, including DEP, correctly have the exact crew count. It changes daily and we all make estimates. Those who use the rig count and well completion data in their predictive algorithms likely lag, but are directionally correct. Ditto those who are using satellite imagery. Meanwhile, for simple folks like us who aren’t smart enough to build an algorithm or profitable enough to invest in satellite imagery, we estimate the old fashioned way. We call our industry contacts for updates, a process which takes a few days so by the time the count is actually published, it’s already wrong. Nevertheless, we see the active crew count now in excess of 125 crews. We counted 8 in the Mid-Con last week. Another thing to consider, our count is “active” and not “effective” fleets. There is a difference which is why we are higher than most. Moreover, some companies contend our count is flush with fleets running small jobs. No doubt, there are some, but this number is small. Case in point, one of our Oklahoma frac contacts had two small crews out the day we were in town. These packages often require less than six pumps, but these pumps will soon be bundled together to go do a HZ job later this month. We identify this company as having one active crew, not two. Some days it’s doing a HZ frac and other days it’s not. Do we lose sleep over this nuance? Not at all. We don’t claim to be perfect, but we believe the boots-on-the-ground approach is the best way to gauge real-time sentiment as well as near-term directional trends.
Barclay’s Energy Conference. Normally a marquis event with all of the energy who’s who trekking up to NYC to participate, but this year, the event went virtual and our impression is the corporate participation rate was much lower. Not a knock on Barclay’s, but an indication of investor interest in energy (as well as a significant number of companies in restructuring, thus not presenting). We used our weekend by the pool as an opportunity to read through a few of the transcripts from those companies kind enough to webcast their zoom discussions. In many cases, there was little new information – not terribly surprising as we are only one month removed from Q2 earnings season. Consequently, we only touch on a few company specific themes/observations below.
- PXD: Nothing jumped out new from an operational perspective, but the Q&A for largely surrounded capital allocation. We were struck by PXD’s candid comments regarding the success (or lack thereof) of stock buybacks. It noted the average price of its buyback was close to $130/share, yet the stock trades at close to $92/share today. With respect to the industry’s use of buybacks, PXD called the industry history “terrible” and frankly, we would agree. It seems buybacks tend to occur most frequently at the top of the cycle. In part because of its buyback history, PXD stated it has not cancelled the buyback program, but “we’re not going to be buying back any stock”. Instead, PXD (and others) are more focused on variable or special dividends. Questions of M&A also featured prominently. Again, PXD offered interesting perspective. It noted that balance sheet issues limit deals right now, but over the next five years, the number of independent E&P’s could decrease from ~75 today to potentially ~25. We’ll see, but if this prophesy is correct, it will put even more pressure on the OFS sector to consolidate as well.
- PDCE: Noted it is presently running 1 rig and 1 frac crew in the DJ. For 2021, it plans to average 1-2 rigs in the DJ. Meanwhile, in the Delaware, no rigs or crews are running. In the Q&A, PDCE alluded to a one rig and one crew program for the Delaware in 2021, but the frac crew would not likely run all year long. The company’s 2020 budget is $500-$550M. In one of the investor slides, PDCE presents its 2-year cumulative plan for $1.0 to $1.2B (i.e. 2020-2021) which means a flat-to-slightly higher budget next year. Also, not new news, but PDCE will spend $50M in Q3 and $100M in Q4. There was plenty of commentary and questions regarding the recent move by the COGCC which voted on a measure to increase setbacks to 2,000 feet from 500 feet. We have not devoted sufficient time to weigh in on this move, but our impression from PDCE’s comments is the local counties should have (or will have) more discretion with Weld County (where PDCE is focused) being more flexible on the setback issue.
- NBR: Much of the presentation took the form of long opening remarks with very little Q&A. Good for someone who’s not familiar with NBR, but not really helpful for someone looking for insightful real-time commentary. NBR did acknowledge its rig count remains in the mid-40’s. It rightfully called out its technology offering and the premium cash margins it has generated relative to peers. The balance sheet remains the central issue for NBR as a focus on FCF / debt reduction remains paramount. With respect to forward commentary, NBR noted differing analyst views on the steady-state rig count necessary to maintain flat production. This range was characterized as being in the 350 to 500 rigs realm. NBR wisely sees the middle of the range as the right level.
- HP: Similar to NBR, management believes E&P maintenance capex will ultimately require more than ~450 rigs running, although HP did not provide any formal guidance on the timing/magnitude of an eventual rig count recovery. Much of the discussion surrounded HP’s technology innovation; its attempts to change the drilling pricing model as well as some discussion on the balance sheet and international operations.
- PTEN: Nothing hugely incremental. PTEN did report its average frac crew count in Q3 will be five. Previously, it had guided ~4 crews for Q3. PTEN, like the other drillers, offered commentary with respect to rig technology as well as gas-powered engines and fuel cells used in its drilling and pressure pumping operations. The theme of dual fuel and lower emissions is increasingly a more popular talking point in the OFS industry today.
- SOI: Reiterated its view that Q3 is up sequentially between 35-45% with Q4 potentially flat-to-down. SOI is generally pretty good with its guidance, so we pay attention. No major revelations imparted during its discussion, although we found notable the company’s comments that it bolstered its R&D staff during the downturn (most others likely slashed). For SOI, which is debt free with plenty of cash, this is a nice luxury which affords it the ability to develop new products and services. The fact the company is focused on R&D, however, is not new as SOI is refining its model such that it is/will be much more than just a sand storage company.
DEP Upcoming Events. We are heading to the Permian next Sunday for one week of meetings and tours. This trip the bride is joining me as we’ll drive our smoker out to cook for some industry friends. In between BBQ’s, we will set up meetings as well as 1-2 industry dinners. Let me know if you’ll be in town. Also, we blasted out a Save the Date for our February Houston Energy Conference and Expo (Feb 24-26). The good news is we are nearly sold out for our outdoor booth spaces even before we’ve finalized our marketing materials and price sheets for these booths, so a big thank you to all. That said, be on the look out for official event materials in the coming weeks. We’ll have about ~50 booth slots inside of Minute Maid Park while we have a few additional outdoor spots open too. In addition, for those companies who have inquired about other sponsorship opportunities, please be patient. We hope to publish all of these options on or before October 1st. This event is truly the cart before the horse. It’s our first; we are learning fast and we’re probably going to make a few mistakes along the way.
Finally, in between now and February, a few other events are being planned and/or have been announced. Namely, the next Houston golf outing is October 14th. That event is essentially sold-out, but given its popularity, we have reached out to a Fort Worth club as we intend to take our golf events to other locations. Right now, we are targeting an event in December. We will also host our annual Christmas BBQ social in mid-December as well.
Our official 2021 calendar of events will be posted shortly to the DEP website. We expect to sign at least two contracts this week for events next year while we will soon be making an announcement on an exciting new hire, so stay tuned.
Super Chicken Sponsorships. For energy friends in Houston, a local spot needs our help. Our good friends at Galtway Industries are leading a corporate sponsorship / fundraising drive for Super Chicken, a fine dining establishment in the Greenspoint area. Like many other restaurants, business is slow due to COVID, but given this is a popular spot for energy folks, we are raising the banner of awareness. Namely, a few corporate sponsorships can help keep Super Chicken open. We are big fans and believe Super Chicken has the most ESG friendly buffalo chicken sandwich in the greater Houston community. So, if you like chicken and aren’t worried about your waistline or if you simply want to provide job security for the heart doctors at the Texas Medical Center, we ask that you lend your support to our friends at Super Chicken. Simply shoot us a note if you have an interest in becoming a sponsor. We’ll then help get your logo on the Super Chicken Corporate Wall of Fame. We’re taking our donation in tomorrow.