DEP Update. Hitting Fort Worth on Monday, Dallas on Tuesday and then East Texas on Wednesday. In concert with this trip, we will host a beer garden social on Tuesday early evening in Dallas. If you like beer and are a client, let us know. Our treat. Other upcoming events include our Permian Basin BBQ Cook-Off on September 30th and our Houston Golf Outing on October 20th.
Ranger/Basic Asset Purchase: Nothing like a last minute twist as the winning bid for the Basic non-California rig/CT/rental assets goes to Ranger Energy Services. RNGR announced the $37M purchase this past Thursday and in conjunction with the transaction, RNGR entered into a new credit facility and private placement arrangement to help fund the deal. Here’s why this transaction matters and for avid readers, some of this is a rehash from a few weeks ago. First, the RNGR/BAS transaction is a significant consolidation play within the U.S. well service sector. Second, we believe there are two more large asset packages/transactions to follow this deal. Patterson-UTI has already indicated a desire to sell the well service assets of Pioneer Energy Services while Superior Energy Services previously indicated a desire to exit lower end onshore businesses, which we presume includes their well service business. Once these transactions occur, assuming they do, the well service industry will have seen five of the top ten companies consolidate/go away (i.e. C&J, Forbes, Basic, Pioneer and Superior). Meanwhile, during the downturn, several small players shut their doors (i.e. Morgan Well Service, etc.). Simplistically, this means greater concentration of assets in few hands.
Next, we would envision (hope) RNGR takes a hard look at the acquired assets. Clearly, not all of the BAS operations performed well and some local operating areas, we contend, don’t have scale. Therefore, if RNGR acts judiciously, we would expect to see RNGR exit lower performing markets and/or sell non-core businesses. Customers who may have enjoyed low pricing from BAS, hypothetically, might be in a for a rude awakening if RNGR pursues a returns-based approach. Now, the challenge for RNGR will be the method by which it exits non-core businesses. Example, while it may make sense to exit a weak geographic region, it may not make sense to sell those assets within that region since rigs, trucks, CT units, etc. all have wheels and can move. In other words, we would hope underperforming yards don’t simply see assets auctioned off. Instead, a more appropriate option might be to simply cut up the rigs and sell for scrap. On the other hand, let’s say there is a particular product line/business segment for which RNGR has no desire to compete in, then selling those assets is kosher as RNGR really shouldn’t care what happens post sale. The objective should be to maximize cash from select asset dispositions, but not dispose of assets which can come back to compete against you. We think RNGR gets this, but it will/should be a focal point on their next conference call.
From our cheap seats, we think RNGR got a good deal (lots of assets at good price with the industry outlook improving) and we support industry consolidation. For RNGR, we suspect the acquired asset inventory is huge, not to mention a bunch of properties/real estate likely comes with this transaction as well. Consequently, if this assumption is valid, then it would seem reasonable to see RNGR generate cash from equipment sales in the coming quarters, thus purchase price bleeds lower. Moreover, with business conditions improving, RNGR can maintain some patience with asset sales as there doesn’t appear to be an immediate need to embark on a fire sale process. Lastly, while we noted two likely deals moments ago, don’t be fooled to think these are the only consolidation opportunities out there. They’re not. In our travels, we have found multiple small well service companies who are “tired” of the business and would happily entertain opportunities to sell. Many are companies where ownership/leadership is nearing retirement and now thinking transition. Consequently, the backdrop for the well servicing industry continues to improve. Meanwhile, with the labor markets continuing to be stressed, this fact, along with consolidation, likely results in a healthy uptick in pricing in 2022. Of course, this won’t happen if existing companies return to bad habits and sell old equipment within their core service offerings. Doing that would only perpetuate the rightly deserved perception of well servicing as a low barrier entry business.
Takeaways from the Energy Workforce & Technology Council Annual Meeting: We had the good fortune of attending the EWTC’s annual meeting this past week in New Mexico. DEP even had the chance to speak, and no one threw tomatoes or laughed at us, so a victory. That said, the mood was good, a fact partially explained by the venue as well as the quality of the conference attendees (good job EWTC). We also suspect the optimism has something to do with business fundamentals continuing to improve. The good news for DEP is our fellow panelists, which included two peer analysts, both of whom are equally as old as us, but a tad brighter, agreed with our outlook for next year (i.e., +100 rigs, +20 frac crews as well as higher OFS pricing). Of course, when too many people begin to coalesce on the exact same trend, that’s about the time things go awry. Fingers crossed, if we are wrong, it will be to the upside. As for new and exciting industry data points, not many surfaced as commentary generally reaffirmed our views (i.e., extending lead times, the push for greater electrification and the need to reduce emissions). In fact, almost every panelist cited buzz words such as ESG in their prepared remarks. Panelists largely agree that investors care more about “G” than “E” or “S”.
We also had multiple service and capital equipment companies claim an intent to limit capacity additions as the need for price trumps the need for volume. This theme has surfaced repeatedly in our discussions with service companies over the past two months and it’s something we’ve been writing about. E&P attendees meanwhile professed the virtues of partnerships and the reliance on the service industry to achieve their goals. Makes sense to us, but we sat in the back row and heard multiple service company grumbling on these points. Finally, we had several discussions over potential COVID vaccine mandates. There is a real concern with some companies about such implications, particularly with those companies who employ north of 100 employees. For select low barrier-to-entry businesses, such a mandate could result in employees jumping ship and going to smaller companies who aren’t forced to comply with such a mandate. We had water-related and workover rig related friends express this concern. Time will tell.
In addition to our time at the EWTC Annual Meeting, another member of the DEP team also participated in another virtual/in-person finance conference in Ft. Worth. This one was hosted by DEP’s accounting firm, Whitley Penn. You should meet them. Nice folks who do a great job. We call out our Whitley friends as we remind DEP subscribers that we are happy to come talk to your employees or Board or assist with any of your events. There are several companies who have requested DEP give market updates to their folks. When we are free, we do it. Preference, of course, goes to our top clients, but time permitting, we’ll do our best to help others.
U.S. Frac Update: We are knee-deep in our U.S. frac market update and hope to publish next Sunday. Presently, we see the U.S. active frac crew count in the vicinity of 215-220 fleets, not the 250+ working fleets as some contend. Further, we would guess the “working” count is closer to ~200-210 fleets as not all active fleets work every single day (recall frac companies use of “active” vs. “effective” terminology). Moreover, there is a view the U.S. fleet could rise ~20 fleets in October, we simply don’t see that (although we hope to eat crow). Our rather comprehensive E&P survey from last week indicated flattish activity through end of October with the potential for very modest Q4 seasonal softness beginning in November. We subsequently caught up with two small E&P companies this past week and the outlook was much the same (i.e., modest rig count growth with flat frac crew count). Over the next few days, we expect to visit with a few additional E&P players, and we suspect a similar message will be forthcoming. Remember, our E&P survey touched ~50% of the working U.S. frac fleet. This week we intend to update with most U.S. frac companies, as well as a handful of equipment builders. Those with whom we’ve already chatted generally embrace our fleet counts and activity observations. Moreover, when both E&P and OFS companies provide candid feedback, we submit this bottoms-up approach is more effective than perhaps excel driven estimates. Stay tuned for a more informed view in about a week (or so) as we will address current supply/demand, new entrants, emerging technology as well as more nuanced matters such as insurance trends.
BKR U.S. Land Rig Count: Nice gain on Friday as the BKR land rig count rose 8 rigs to 505. W/W gains concentrated in the Permian and Eagle Ford.
Permian BBQ Update: We are up to 1,043 registered attendees as our repeated pestering for friends to register is beginning to bear fruit. However, a couple things to remember. First, there are still a number of cooking teams and sponsors who have yet to register a single employee. We hope this may prompt some to inquire, but if not, we’ll send targeted reminders on Monday/Tuesday. Second, the reason for our registration persistence is due to the fact a third party will handle the registration desk. While the DEP partners might know you, there’s a good chance the folks at our registration desk won’t. Therefore, if you show up and have not registered – that is, you aren’t on the list, our registration helpers might not let you in. Doesn’t matter if you are the CEO. Sorry. So, please take a moment to register. If you need the link, it’s ok to ask. We’ll happily send it to you if you are a client. Finally, our sponsors and cooking teams have tickets to invite customers. They each get a specific registration code. We are seeing a trend where only employees of the cooking teams/sponsors are registering and not any of their non-employee guests/clients. That’s fine with us, but you have been very generous with your financial support, and we would hope our sponsors would invite their customers as that’s good for you.
Our working event flyer is attached. We’ll be adding a few additional sponsors and cleaning up our judges list tomorrow with a final circulation expected mid-next week. If you would like to sponsor the event, please let us know.
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