Analysts See Frac Crew, Activity Growth Ahead for US Shale Sector

After a quick and hard fall in May, the U.S. hydraulic fracturing sector could see crews rise to 170 by fourth-quarter 2021 with the Permian Basin and Eagle Ford Shale registering the largest year-over-year growth, analysts forecast.

The increase would be a rebound from the 60% overall drop in frac crews seen earlier this year, Westwood Global Energy Group data show. But far below high activity levels seen during shale’s heydays.

“We went from 262 to 102 frac crews,” from the first to the second quarter this year, Luke Smith, analyst of frac HHP for Westwood, said during a webinar Aug. 25. “By the end of this year, we think that the Permian will become about 30% of the market for active frac crews, and some of the gas basins will be essentially about 40% of that number.”

The firm forecasts frac crews will reach a quarterly average of nearly 100 during second-half 2020. That’s far below the days of 400 or so frac crews recorded in 2018.

The outlook was delivered as oilfield service (OFS) companies cope with drastic spending and activity cuts made by E&P companies in response to lower oil prices and the coronavirus-driven demand slowdown. Drilling and completion activity collapsed alongside fracking as a result earlier this year. Many OFS companies have shuttered facilities, laid off thousands of workers and issued billions in write-offs related to pressure pumping and other parts of the business. Some have gone bankrupt.

Oil prices have since steadily improved, stabilizing around $40/bbl after going negative in late April—an improvement courtesy of OPEC+ and U.S. production cuts.

Todd Bush, head of onshore for Westwood, pointed out that the companies the firm tracks have less than half of their revised 2020 budget left to spend this year. Westwood data show a group of E&Ps with 40% of their budget remaining for the second half of the year, and a group of OFS pressure pumpers with nearly 45% left.

“One thing that’s notable here is some of the U.S. gas producers have seen very little change to their capex and their program,” Bush said, highlighting EQT Corp., Antero Resources Corp., Cabot Oil & Gas Corp. and Range Resources Corp. “The U.S. gas producers have really only revised about 19-20% compared to many of the other independents and many of the other supermajors that have capital revisions. So, we think this spending is going to have significant influence across the oilfield supply chain.”

Looking Back

For the most part, however, E&Ps—supermajors and independents alike—slashed spending significantly.

This means less spending on dual-fuel engines, fleet upgrades or expansions, and less investment in e-frac, Smith said.

“We know that this reduction in capex is going to lead to essentially a reduction in horsepower,” he added. “We’ve seen the utilization go from about 75% in Q1 to about 30% in Q2.” He singled out a group of companies whose collective hydraulic horsepower (HHP) dropped from about 8.3 million HHP to 3 million HHP. “That’s a pretty big reduction in horsepower coming in U.S. onshore from these companies. And of course, because we have a decreasing utilization, that means we have a decrease in frac crews.”

Lower 48 mine utilization also dropped, falling 57% in manhours worked from second-quarter 2019 to second-quarter 2020, said Jonathon Clark, lead analyst of frac sand for Westwood.

“There was about a 44% decline from Q1 ‘20 to Q2 ‘20,” he said.

Additional curtailments are expected this year and in 2021.

“Currently we’re projecting to end 2020 with an imbalance of supply and demand of about 45 million tons. Our expectations are that mine owners will be eager to ramp up production in the near-term,” Clark said. “But due to further pricing constraints, supply will eventually start to taper off beginning in 2022 with further mine utilization declines and eventual mine shutdowns. So again, our belief is really starting in 2022, we’ll begin to see sand supply leveling to about 100 million tons annually. “

Tough market conditions have forced several companies into bankruptcy. Frac sand companies include Hi-Crush Inc., Vista Proppants and Logistics Inc. and Covia Holdings Corp.

Two major pressure pumpers—Calfrac Well Services Ltd. and FTS International Inc.—have also filed for bankruptcy.

Looking Ahead

E&P relationships, more than a particular basin, will determine the future of OFS companies, according to Smith. He pointed out frac crew market share by basin, highlighting challenges of some companies’ E&P clients in various basins.

“If you’ve kind of put all your eggs in one basket in one basin and with one company and they decide to essentially go from 15 drilling rigs to two and six frac crews to one, then, you know, that’s something that a company will definitely be feeling,” he said. “For some companies, the relationship with these clients of theirs is going to kind of determine their future.”

Having clients that have not cut back too severely helps, he added.

Looking forward, the situation appears better with higher oil prices and E&Ps beginning to increase activity.

“From Q4 2020 to Q4 2021 we definitely see considerable [frac crew] growth of something around 65% as far as year-over-year growth from those two quarters,” Smith said, adding most of that growth will come from the Permian Basin and Eagle Ford. During that same time frame, Westwood forecasts about a 125% frac crew growth in the Permian and 100% growth in the Eagle Ford.

So when could activity return?

“Our anticipation is as it gets closer to that $55-$60 range by kind of 2022 we’re expecting more and more activity as well as capital to come back so that pressure pumpers, sand companies, logistic companies, everyone in the frac sand supply chain can be kind of well-capitalized and ready to serve their E&P clients,” Bush said.

However, capex revisions and guidance delivered by companies will be imperative to determine how the recovery transforms next year, he added.