• Wall Street-imposed capital discipline has public E&P companies slowing capital spending in 2019.

  • Privately held E&P companies, buoyed by higher commodity price, may yet fill the activity gap.

The fortunes of the well stimulation industry in 2019 will be tied to privately held oil and gas operators. That message emerged early during first-quarter 2019 earnings calls.

Those calls also revealed more than 20 well stimulation fleets idled rolling into 2019, or roughly 1 million in hydraulic horsepower capacity. Furthermore, publicly held well stimulation firms were bringing on newer, higher capacity equipment now as replacement for older, lower capacity and worn out equipment so that net change to the active well stimulation fleet appears to be minimal for this year.

While oil service management teams noted the industry had bottomed in the first two months of 2019, few were willing to definitively claim a bottom other than to note that the second-quarter fracture calendar was improving, though visibility, as communicated by customers, did not stretch beyond the first half of the year.

Well stimulation management teams cited a sharp drop in pricing for their services to date in 2019, despite a significant increase in performance—although some of the price decline was offset by lower pricing for materials and supplies such as sand. The stimulation sector is getting better due to a greater percentage of 24-hour work, zipper fracs and more work tied exclusively to pads, primarily in the Permian Basin, which represents almost 45% of activity by volume. Clearly, the well stimulation sector is finding itself in the same boat as land drilling contractors where performance has improved significantly although the sector has not been rewarded with higher rig rates for its contribution.

Privately held companies represent 42% of drilling activity, the largest individual share by operator class. What makes this group significant, other than market size, is the fact that privately held operators, many backed by private equity, respond quickly to market conditions. The No. 1 market condition remains the bull run in oil prices during 2019. Privately held companies saw rig count top 500 units on average during the fourth quarter of 2018, the highest level in four years. That activity dropped to 450 rigs on average in the first quarter this year.

Curiosity is rampant on whether the public E&P companies with their larger individual rig programs will respond to 2019’s bullish price signals. The word to well stimulation firms from drilling and completions managers in early 2019 is that most public E&P senior management teams remain committed to capital discipline.

Indeed, the handful of public companies that announced expanded capital spending during first-quarter earnings calls, even for plausibly rational business conditions, saw stocks sell off in double digit percentages. The financial industry has little appetite for E&P outspend, and E&P management teams appear to be taking that attitude to heart even as oil prices reach the historically bullish $65 threshold.

That explains in part the rollover in rig count. The oil and gas industry fell below year-ago levels in rig count as the second quarter began with capital spending versus 2018 projected to decline between 10% and 15%. Rig count by operator class is now down for independents, whether large, mid- or smaller capitalization classes. Rig count is up a little for integrated oil companies and recently began rising for privately held E&P companies.

Efficiency has become the name of the game for well stimulation. The old rule of thumb of one fracture stimulation crew for 2.5 drilling rigs has now increased to one crew for 3.5 rigs. Stage counts per day are doubling anecdotally from the traditional four or five per day. But efficiency is also the same reason why the well stimulation industry remains oversupplied in equipment and crews, a condition not likely to come into balance until 2020.