5.25 DEP Letters From the Road – Industry Observations – May 18-22 Weekly Recap

We hope everyone had a nice three-day weekend.  We know we did as we enjoyed a family frac sand mine drive-by on Saturday, followed by brisket, ribs and cold beer this evening.  Most importantly, the weekend is a reminder to never forget the sacrifices of our soldiers and their families.  We give a shout out to all the great tributes that our oilfield friends have posted on social media.

This weekend we address a question from last week’s field trip note as well as update our weekly rig table.  Look for some updates from the Permian this week as we are driving over to Midland first thing tomorrow morning.

• Rationale for E&P’s adding frac crews in June/July.
• BKR weekly rig count down 21 rigs w/w to 306 rigs.  Down ~60% from Q1 average.

Potential June/July Frac Crew Additions:  As we reported from our DFW Letter from the Road on Wednesday, we are tracking a few instances of private E&P’s potentially adding frac crews in June/July.  Some have inquired why companies would add a crew this quickly.  Yes, oil prices have returned above the $30/bbl level, but just a few weeks ago, spot prices went negative.  Well, according to our contacts, the decision to move early is based on (1) desires to lock in really cheap prices and (2) fears of limited frac capacity later this year when others seek to resume completion activity.  Remember, earnings season not only highlighted the herd mentality to shut-down and conserve cash, but it also highlighted intentions by some E&P’s to resume completion activity in 2H’20.  In some cases, E&P’s were specific about their anticipated frac crew additions and/or 2H’20 capex budget dollars.  As we dug through Q1 earnings conference call transcripts, we were able to identify at least 20-25 incremental frac crew deployments.  Admittedly, a portion of our estimate is based on the trajectory of remaining capital spending dollars.  Not all E&P’s, however, provide similar granularity, but a reasonable extrapolation suggests the industry could see as many as ~50 frac crews go back to work before year-end.  This, of course, assumes WTI prices stay above $30/bbl.

So, back to the rationale to add crews sooner rather than later.  First, oil service pricing is at rock bottom – this applies to all OFS lines such as frac, coiled tubing, frac sand, plugs, etc.  Low pricing and an improving commodity price is a good combo.  Perhaps, this is why multiple service companies tell us they are getting requests for pricing (i.e. customers are re-running economics).  Second, consider the fact most oil service companies are fighting to survive.  Keeping employees on the payroll in anticipation of a market recovery is not a realistic option for most.  And, without committed work, do we think these companies will rush out to rehire employees right away?  Will they do this at current pricing?  One would hope not, but obviously some will.  And, when people are rehired, will the crews be comprised of exactly the same people as before or will the team be a combination of folks who haven’t worked together before?  Could this impact efficiency?  Perhaps.

As for the equipment, there is no shortage of it sitting against the fence, but what really is the state of this equipment?  What will the status be in 3-6 months if it hasn’t been used?  It would seem reasonable to us that the longer it sits idle, the more headaches and time required to make this equipment work-ready.  We doubt it is as simple as starting a car and heading out on a drive.  Obviously, each company will have a different warm-and-cold stacking strategy, but our contention is the industry simply can’t go back to work the same day it gets an inbound call from a customer.   Rather, some time will be required.  This would lend some credence to securing a “hot” crew which could probably be found if called out today.

Therefore, to stay ahead of the game and advantageously benefit from the unsustainable OFS pricing levels, a smart E&P company, who believes oil prices will continue to move higher, may be wise to go ahead and secure a best-in-class completion crew soon.  Yes, doing this now is unconventional, but following the herd doesn’t always work out.  Last time we watched National Geographic, the slow water buffalo always seems to lose to the lions.  And in keeping with our wildlife analogy, a rising volume of E&P inquiries for equipment is akin to blood in the water.  Consequently, oil service companies will sniff this out and if given the chance, like a shark, they’ll eat you alive.

Our advice to our oil service friends: be smart, manage capacity reactivations, consolidate and let your customers bid up the work.

Our advice to our E&P friends: be smart and get the best people and best equipment while you can.

Call us crazy, but history repeats itself.  This cycle has happened before and we tend to think it will happen again. That’s why they call it cycles and why energy is a cyclical business.  In other words, things will get better.

BKR Weekly Rig Count.  Down again as we shed another 21 rigs last week.  The rig count is now down ~60% from the Q1 average.