DEP Update: Apologies for the late note, but BBQ planning/packing/logistics took up a lot of our time this weekend. On that point, tomorrow begins our drive to Midland with the DEP smoker in tow. We look forward to hosting Thursday’s Permian Basin BBQ Cook-Off and we are especially thankful to all our sponsors and cooking teams. Please note we will close registration on Monday afternoon, so if you haven’t filled out your registration, please do so quickly. As of this morning, we had 1,555 registered attendees. Unfortunately, a few cooking companies and sponsors have yet to register folks and the registration list would indicate a number have not invited a single customer. Just another gentle reminder this is a benefit/option for our cooking teams/sponsors, and we hope you take advantage of it.
As for this weekend’s industry commentary, we had hoped to publish our updated views on the U.S. frac market, but we will push the formal report until next Sunday. Apologies. We simply ran out of time this week and still need to update with many industry contacts. That said, we do include a summary of a few early observations below. Also, after reviewing our BBQ attendee list, we have the good fortune to be joined by 17 frac companies who maintain ~89% of the active U.S. capacity. In addition, every major engine company, all the largest frac packagers, the most respected pump and fluid end manufacturers, an exceptionally large showing of E&P company executives, including heads of completions as well as supply chain as well as multiple sand and wireline friends will all be at the BBQ with many of them cooking within 200 yards of our smoker. Therefore, for ten hours and a few cold beers, we’ll be blessed to have phenomenal 1×1 opportunities with essentially the entire U.S. frac market. For this reason, we believe a one-week delay in our report is warranted.
Permian BBQ Update: Current registration totals 1,555. These attendees come from roughly 270 OFS/Capital Equipment/Midstream companies and 56 E&P operators. In addition, there is a healthy group of companies represented from the professional service realm, not to mention the good folks at UpRight Digital Media, Oilfield Helping Hands, the Energy Workforce & Technology Council as well as the Permian Strategic Partnership. As noted above, we will close registration on Monday afternoon, so reach out to Bill Austin at firstname.lastname@example.org if you need the registration link. I will be logging off soon and not checking emails during the drive tomorrow.
Rig/Frac Crew Survey Update: We updated our E&P rig and frac crew survey to account for additional feedback from E&P contacts. We have now received feedback from over 50 E&P companies regarding current and expected activity levels for drilling and completion activity. The companies presently operate ~294 land drilling rigs and ~118 frac crews as of the time of our survey. We believe this tally represents ~58% of the U.S. rig count (per BKR) and ~55% of the active U.S. frac crew count (per DEP). The companies intend to increase their respective rig counts by ~52 rigs and ~11 frac crews, representing ~18% and 9% growth respectively. Extrapolating the survey results would imply the U.S. rig count grows by close to 90 rigs over the course of the next year while the U.S. frac fleet could grow 20 fleets. Given the forward curve for both oil and natural gas, we would take the over.
BKR U.S. Land Rig Count: +4 this week to 509 rigs.
Perspectives on the U.S. Frac Market – Preview. Our industry update calls are not yet complete, as noted above, but we reiterate our view the U.S. active frac crew count remains in the range of 215-220 with an effective or working count closer to 200 on any given day. We simply can’t get to the high numbers quoted by others. We’ll dig into that next week. As for the market, pressure pumping contacts are trying to raise rates. Some claim attempts to raise base pricing by 20%. Others claim efforts in the high single-digits. The problem with percentages is we don’t necessarily always know the starting point, so we can’t make apples-to-apples comparisons. But here’s the kicker, while companies are attempting to raise rates, we had multiple contacts this week still report incidents where they were undercut on price. Some speculate the knife-fights are simply efforts to fill growing white space in Q4 as companies want to keep crews hot. Other things which are noteworthy. High natural gas prices are getting more attention, including plans by many E&P’s to ramp activity in the Haynesville. That’s good news and bad news as the frac industry needs more demand but remember high pressures in the Haynesville kill frac equipment, thus fluid end contacts and forging friends see improving orders. Further, while newbuild activity is largely dormant, we believe the market will see ~25 emission-friendly fleets over the next 5-6 quarters, subject to no major lead time issues. We define emission-friendly newbuilds as electric, direct-drive turbine and/or Tier 4 dual fuel. We do not include Tier 4 dual fuel conversions. Lastly, the move towards emission-friendly equipment, we submit, will yield a bifurcated market where premium pricing will materialize. Consolidation desires, meanwhile, still permeate amongst all our industry contacts. As noted in an Industry Observations piece not long ago, the frac market, we submit, is only a couple deals away from a tight market given how many of the smaller privates are essentially sold-out and have no spare capacity. Finally, if our E&P survey is directionally right, we would expect to see U.S. frac activity up at least 10% from current levels in 2022.
Key Energy Asset Sale / Operations Update. More progress with its operational cleansing at Key as the company announced the sale of its trucking and water business. Terms of the sale to Water Energy Services were not disclosed, but the sale, in our view, is operationally the right move as Key positions itself to focus on its core competency, well service rigs. Presumably, Key will use cash proceeds for either debt reduction or for acquisition purposes as the well service industry is in consolidation mode with multiple deals likely in the market. Equally important, Key announced current activity levels are at their highest level since November 2019. Recall, Q4’19 rig hours totaled 115,000 while rig hours in Q1’21 were 89,600 (~Q2’21 has not yet been disclosed). In other news, KEG’s rig retirement program continues with 350 rigs cut up since the end of 2019. The company intends to rationalize its fleet to ~400 rigs which implies another ~100 rigs will be cut up soon.
Independence Contract Drilling. ICD provided an operations update this past week. The company recently signed a contract for the reactivation of its 16th rig. This rig will go to work in the Permian in mid-October. The company also sees another rig deployment by the end of the year. Thus, ICD goes from 15 rigs to 17 rigs, a +13% improvement. Dayrates are also moving higher. Not a surprise, but the magnitude is noteworthy. Specifically, leading edge rates are $3,000/day higher than the Q2 average which was $16,514/day. The range of increases is consistent with our prior observations, so the announcement serves more as a reaffirmation of our views and not new news. Nevertheless, it’s a positive for ICD. Finally, ICD continues to focus on shorter duration contracts as it believes dayrate improvement will continue.
The E3 Company – Company Tour Takeaways: In keeping with tradition, we conducted additional field meetings this past week, traveling north to the DFW area and then heading east to Kilgore. On this trip, we visited privately-held The E3 Company (TE3CO), a new relationship to DEP, but not necessarily a new company. The purpose of the visit was to learn about an important piece of the completion set-up, the pop-off unit. Frac guru readers please don’t laugh but we must confess this is not a piece of equipment DEP has focused on historically, so when given the chance to tour the TE3CO shop, we happily jumped at the opportunity. For our non-frac readers, the pop-up is an important safety component on a frac site which will helps guard against an overpressure event.
For those not familiar with TE3CO, the company started in 2016 and today has operations in East Texas, the Marcellus, Eagle Ford, Bakken, Canada and the Permian. The company’s first product called the Safety RAT (Relief Automation Technology) debuted several years ago. This is the company’s pop-off unit solution. Based on our discussion, the company estimates its RAT system has over 40% US market share. Admittedly, it is hard for us to verify this claim, but if our estimate on working U.S. fleets is correct and if most frac fleets have one pop-off system on site, then company’s active count would suggest the company’s market share estimate is valid. The way the business model works today is most of the company’s units are rented to frac companies, but in recent months, we understand some E&P companies are now reaching out to companies like TE3CO in order to self-source the system. We believe the company has multiple name-brand E&P direct users. This appears to be a new twist as historically the frac company either owned a system outright or rented from companies such as TE3CO. As for competition, TE3CO goes head-to-head with stalwarts such as FMC, SPM, KLXE, NOV and others. Advertised benefits of automated systems are reduced NPT, less workers in the red zone and fast response time should valves need to be opened.
Recently, the company introduced its latest product called the Safety BAT (Bleed-Down Automation Technology). This product is designed to prevent danger during wellhead equalization after a flowline pressure test or full pumping system depressurization. The system does not require manual intervention as the operator uses a remote electronic control system to specify the desired pressure condition and can open the valves remotely. As this is a new offering, we don’t have a view on market share, but both the RAT and BAT are built in the Kilgore facility which we toured. If memory serves correct, these are both patented systems. As usual, we have no way to opine on the quality of TE3CO’s product offering vs. peers, but the opportunity to learn about a system for which we knew very little was appreciated. Moreover, the company’s market position seems impressive given the quality companies with which it competes.
Random Observations. We visited with a company which leases tractors to various industries. The company recently placed an order for heavy duty tractors and was advised the lead time is now approaching one year. Further, finding parts for the company’s existing rental fleet is becoming harder. Consequently, monthly lease rates have moved up by 29% in recent months.