Story by Mella McEwen |Midland Reporter-Telegram| Analysts watching the frac spread count – the number of pressure pumping equipment crews at work completing wells – have noticed a shift fueled by commodity prices.
“With gas pricing and the price deck so unique, equipment in gas basins is peeling off and moving to oily basins,” said Matt Johnson, chief executive officer of Primary Vision Network. The Permian Basin is a prime destination, he added.
Speaking with the Reporter-Telegram by telephone, Johnson said the frac spread count as a whole is down 23 year-over-year and over 30 so far this year.
“That’s a swift 10% from renewed capital expenditures and, with inflation and rate fears still lingering, we should see further volatility,” he said.
That’s in the face of a tight equipment market – Johnson estimates there could be 324 frac spreads totaling 16.5 million horsepower, but potentially made up of equipment nearing their end of life. In reality, he said, the actual count may be closer to 300 to 310.
“If oil reaches $130, $150, those pressure pumpers will find that equipment,” he said.
Companies are ordering new equipment, but Johnson stressed they are not expanding their fleets but rather replacing existing equipment that operates on diesel with new dual-fuel or electric equipment. In part that’s because there is little capital available for fleet expansion, he explained.
That leaves the sector ripe for consolidation, he said, with smaller companies with just a handful of crews likely to be acquired by larger companies or exit the market altogether. Banks that do finance new equipment will expect it to be maintained, he said.
An airplane requires 100 people to maintain it, from those who service the fluids and electronics to those who rotate the tires. It’s a similar situation in the frac equipment market, he said – those frac trucks sitting in the yard subjected to heat or cold must be maintained.
“It’ll be interesting over the next six months to see who survives, who has the disciplined balance sheet,” Johnson remarked. Consolidation could leave the sector with about 200 spreads.
The operators that hire pressure pumpers to frac and complete their wells are also cautious, wary of a possible recession and continued high service rates.
Johnson forecasts that the nation has an eight-week inventory of drilled, uncompleted wells (DUCs) “even if we don’t drill another well, (but) that’s not going to happen.”
Oil production appears poised to stumble in the fourth quarter, he predicted – nothing substantial but a drop of 300,000 to 400,000 barrels. Still, “a lot can come back. Prices are strong and we’re not in panic mode at this point.”
The biggest impact is on the companies that provide ancillary services, he said.
There is some correlation between the rig count and the frac spread, he said, but there is a strong correlation between frac spreads and oil and natural gas production. If the spread declines, a decline in production will follow. Similarly, if the spread rises, a rise in production will follow.
He sees a necessary shrinking of the nation’s drilling rig fleet because “we’ve had too many rigs for years.” But it remains to be seen how that may impact the completions sector.
“We could potentially see a shift with drilling, particularly the public companies,” Johnson said. “We’ll watch second-quarter earnings and see if they report the same-day rates if there’s been a change in contracts.”
