Oil services companies have gotten good at hydraulic fracturing, perhaps too good at it. According to , fracs per day have increased by 50% in the Haynesville Shale. While that may seem like great news, it could be very frustrating for oil services companies. Let’s diagnose why and prescribe a potential solution that may resolve this malaise.
Early symptoms: shooting oneself in the foot
During a panel at the EIA energy conference last month, Southwestern Energy Company (NYSE:SWN) vice president Jim Tramuto declared that we had reached what he called the second quarter of the oil and gas boom. What he means is that companies once rushed to get a well in the ground just to prevent their leases from expiring. Now that those leases have been established, these companies are now focusing on optimizing their operations to get the most out of each dollar spent.
The one thing you can give the oil and gas industry credit for is that it learns quickly. New rig technology like Nabors Industries Ltd. (NYSE:NBR)’ PAce-X rig have allowed pad drilling methods to increase wells per rig by 34% in some of the more “mature” shale plays like the Eagle Ford, Bakken, and Marcellus. Also, the 50% gain in fracs per day mentioned above has come thanks to methods such as zipper fracs, which involves alternating pressure at two wells versus fracking one at a time.
As much as exploration and production companies have to be happy with these sort of results, it is actually causing a bit of a problem for oil services companies. In the case of rigs, if each rig is able to drill 34% more wells, then a lot fewer rigs are needed. For oil services companies, frac crews normally run on day rates, so if they are doing more work in a day, fewer frack crews are needed.
Talk to your CFO if you experience bloating
This quarter, Nabors Industries Ltd. (NYSE:NBR), Halliburton Company (NYSE:HAL), and Schlumberger Limited. (NYSE:SLB) have all struggled in their pressure-pumping businesses because of oversupply in the current market. According to Nabors Industries Ltd. (NYSE:NBR) CEO Anthony Petrello, this has led to a very competitive market: “It is not unusual to bid frac jobs against 20 other pumpers, and sometimes as many as 35 show up. We have seen some instances of competitors winning bids with economics that at least from our perspective appear to be near cash break-even.”
The bad news doesn’t end there, either. These big gains in efficiency also mean that exploration and production companies are burning through their capital expenditure budgets faster than expected, which could result in a steady drop in business for oil services for the rest of the year.