Frac’ers never want to admit that they’re idle, but we’re idle. We need producers to work and right now they’re not working very much. Blame that on low natural gas prices, high interest rates, capital reallocation, stock buybacks, outsized dividends, election year follies, declining lease quality, burdensome regulations, or whatever other reason you like, but producers just aren’t working much these days. Inflation hasn’t helped our cause either. $58 oil in 2018 is the equivalent of $72 oil today. As a counter, frac pricing has nudged up, but nothing close to what we’ve lost to inflation. Eating into our margins too is discounting. Every attempt is being made by services companies to get E&Ps to work. But to be sober about it, not much is working.
Consider the VanEck Oil Services ETF (ticker: OIH) in which small and midcap oil field services companies (OFS’s) make up 80% of the fund.
All this talk of burgeoning LNG markets in Asia and Europe, and natural gas as a transition fuel, and yet the polestar of natural gas production, the Marcellus/Utica, has seen frac spreads drop from 40 to 30 a few years ago, to the current 17. That’s 17 frack spreads feeding transcontinental pipelines and the northeastern power generation machine. Maybe someday some movement, or some jury decision in an otherwise activist court, will reverse this anti-carbon bias, allowing demand and perennially low gas prices to rise and LNG terminals to flourish, but in the meantime, entire frac fleets sit by idly rusting into grown-over lots.
That makes for OFS blood in the water, and the E&Ps know it. Adrift and bleeding out are the drillers and cementers, frackers and wire-liners, all of us stuck in each other’s miserable company, quietly speculating on who will go to the bottom first. Below bottom really, because one of us will always reach down further, right through the bottom of profitability into the muck of chasing market share—a euphemism for bankruptcy.
Over the years I’ve seen this price capitulation play out uninterruptedly, usually coming from the same group that talks up horsepower over profitability, that sells jobs at prices that miss the costs of pumping, let alone maintenance programs, cap ex replacements, (replacements, not expansions) benefits, salaries, Christmas parties. It’s playing out now at one of our frac camps. An out-of-state group rolled in and took work below even our costs. And we have the logistical benefits of being locals. But that’s their right. Anyone can lose money any way they want. But surely, they must understand, right? That service companies that go to the bottom, perish on the bottom, especially with their self-assurances of “this time it’ll be different.” Our willingness to capitulate to price deflation, our bloodletting, will never stop. And just the same, E&Ps will never stop exploiting because when one OFS fails there has always been another in a conga line of “next, next, next.”
But what to do with the measly 17 frack fleets covering the Marcellus and the Utica? That’s an unthinkably low number, a hope-to-God bottom. It’s worse than last call at a singles bar. Of course you’re going to do something stupid, especially if you’re a services company desperate for work. Our survivor’s instinct will overrule good sense. In a stair step of lows to lower lows, one of us will succumb to the neural onset of a death wish, so desperate is our need to please our E&P masters, and—of course—to work, even if it means losses. It’s the buckets bailing out the sinking ship moment, in which, predictably, the end result is always the same—one of us taking a Swaney off the precipice of measured patience, financial prudence, good common sense. Following will be the inevitable trip to Sherwin Williams, when the colors of the most aggressive price cutters is painted over by the survivors. BJ, C&J, Superior, and Producers, all gone but their equipment living on under fresh coats of new paint.
Look above at the frack spreads and the rig count and the obvious answer is we’ve overbuilt; too much money chasing too little work. Look too and see if you don’t see “consolidation” in the graph. Like the E&P’s recent M&A run, the OFS sector may have a few more deals to go as well. If there isn’t room at the table for everyone, simply remove a chair or two. There’s more for everyone that way, at least for a while.
Eventually, the industry will turn back on, but with it will come new demands for newer equipment, modifications, and even better practices than the gains in efficiencies we’re logging these days. Frac spreads started out as Tier 2, progressed to cleaner burning Tier 4, then dual fuel and now electric. Bringing out older equipment won’t satisfy the E&Ps any longer. ESG may be falling out of favor, but climate accountability may stick and with it demands for expensive things like electric fleets. Just as we serve our masters, the E&Ps must serve theirs—climate minded bankers and investors—and the occasional states’ AG who’s higher-office aspirations are generally marked by a rallying call of “just stop oil.”
In the meantime, service companies will continue to struggle but the best of us have been built to struggle. What other industry sees constantly recurring swings in revenue of twenty, thirty, forty percent? How many other industries are constantly forced without much warning into right-sizing their enterprise, hiring, laying off, insurance-on, insurance-off, pleading with bankers, ignoring bankers, seeking investors, ignoring investors, maneuvering and not maneuvering, in a tug of war, a Jekyll and Hyde state of schizophrenic paranoia. Had Freud lived through the shale revolution, the Great Depression, the OPEC market share fixation of 2015 and 2016, the pandemic, and 2024, he’d have come up with a name for us, a condition, something about overachieving to the point of sure demise, something about working and innovating ourselves right into the poor house.
So far, I’m putting the blame on my OFS brethren. But that’s like blaming the chicken for the wolf that ate it. It’s really the E&Ps. They’re the masters. Me and my service-side brothers and sisters are just the dogs. We jump, sit and bark at their command so long as we have spare capacity. And then, when E&Ps are working and there isn’t a single piece of equipment left in the yard, we dutifully remain obedient and self-denigrating because we can’t help ourselves. If there was an OFS Anonymous, it would be the best attended meeting in Texas, bigger even than half-off wings night at Little Woodrow’s Bar and Grill in Midland.
To be fair, I really don’t know how E&Ps do it, especially in the gassier shale plays, which with the rise in associated gas is becoming more of them. The margins are just so thin, even with natural gas prices up a tick, though still abysmally low, seemingly forever low. But sorry guys. For now, this pity party is for us service folk alone. Most times it’s about you, but not this time. This time it’s for us, your best friend; really, man’s best friend.
By Dan Doyle for Oilprice.com