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Energy Stocks

Getting Pumped Up

By Peter Staas, on Jan. 26, 2018

Editor’s Note: In this feature article, Mr. Staas discusses companies involved in energy drilling, including Halliburton (NYSE: HAL), Schlumberger (NYSE: SLB), Superior Energy Services (NYSE: SPN), Concho Resources (NYSE: CXO) and Forum Energy Technologies (NYSE: FET).

Whereas pricing power remains a dream deferred in the onshore US drilling market, a favorable supply-demand balance in the pressure-pumping service line has enabled operators to push through significant price increases in the first half of the year.

In part, this recovery comes because the US market for pressure pumping—the horsepower that propels the fracturing fluid and proppant into the reservoir rock to form cracks—faced a persistent oversupply even before oil prices began to weaken in summer 2014.

Accordingly, the market has had more time to heal on the supply side, with operators idling capacity and deferring maintenance. As of the first quarter, pressure-pumping capacity had declined 31 percent from the peak reached two years earlier.

On the other side of the equation, surging rig productivity has driven a significant increase in the number of drilled wells awaiting completion, as the existing fleet of pressure-pumping capacity struggles to keep pace. The inventory of uncompleted wells has grown rapidly in the Permian Basin.

(Click to enlarge.)

This lag between drilled wells and completed wells, coupled with recent strength in oil prices, suggests that oil and gas producers may allocate more capital to hydraulic fracturing in the first half of 2018 to work through this backlog–especially in the Permian Basin. After the rate of price increases in the US pressure-pumping market softened in the third quarter, stepped-up hedging by upstream operators suggests that activity levels could support further upside in 2018.

The big question for the pressure-pumping market is whether capacity additions—aside from capital, the business has a relatively low barrier of entry—will overwhelm demand, a real concern in a shorter-cycle market where customers can quickly scale activity up or down in response to commodity prices. Albeit a blip, exploration and production companies’ lack of urgency to complete underscores this point.

To date, most of the capacity growth in this business has come from reactivating equipment idled during the down-cycle. In many instances, new capacity merely replaces older frac spreads that have worn out.

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