The inflection point for pressure pumping is in sight.
Well stimulation providers are reporting isolated pricing increases and pointing to rising demand for pressure pumping services as geopolitical and speculative activity boosts commodity prices, underwriting an expansion in operator spending programs.
Rising demand for pressure pumping services is coming despite an unconventional rig count that largely has been unchanged over the last 90 days, signifying structural changes at work in oilfield services.
Price increases are difficult to determine in pressure pumping since invoicing represents a black box amalgam of bulk commodities, services and equipment. But pressure pumping service providers are speaking in terms of 5% increases on base pricing over the last 90 days, as well as pass-through increases in the form of higher costs for greater use of bulk commodities such as sand or other proppants.
The well stimulation sector began the year with contrarian arguments from a handful of sell-side analysts predicting price increases and a tightening market in 2014 for the well stimulation sector. Those predictions stood in contrast to the consensus perception of the industry as oversupplied by up to 2 million hydraulic horsepower (hhp), as evidenced by utilization rates below 80%. Meanwhile, price per stage declined in the first quarter of 2014.
Initially, the argument for a positive change in pressure pumping pricing centered on the possible return of demand in dry gas markets as the industry scrambled to refill natural gas storage from a long, tough winter. However, demand increases for well stimulation services in dry gas markets have been modest at best. So when pressure pumping companies began announcing capacity additions in the second quarter of 2014, it further encouraged the notion that the well stimulation sector would wallow in an oversupplied market well into 2015.
However, subtle changes in the market undermine the current oversupply consensus. Results from the last two regional surveys of pressure pumping vendors and their customers, conducted by Hart Energy over the last 30 days in the Permian Basin and the Eagle Ford Shale, have found anecdotes that pricing per stage has reversed a three-year decline and is now rising, and some discussion that vendors are able to push individual pricing modestly higher.
Furthermore, survey responses suggest the change is structural in nature and stems from the transition in 2013 to pad drilling and batch completions. Pad drilling has created more wells per rig, a notion now well understood in the industry. However, the other side of the coin--batch completions--means pressure pumping fleets are tied up on location longer as job requirements move from completing 15 or 20 stages in an individual lateral to completing 125 or 150 stages on a pad. The average number of stage completions per day increased, thanks to 24-hour scheduling, and often reached six or seven stages in a 24-hour period vs. five previously. Despite those efficiency improvements, the transition to batch completions means a fleet that previously finished a job on location in six or seven days is now on location for three or four weeks before it is able to move to the next location.
The practical impact is pressure pumping equipment is essentially removed from market while it is tied up on a pad, creating a bottleneck in supply even as the industry generates more wells per rig, providing additional organic demand for well stimulation services.
Operators have moved to greater intensity downhole as they attempt to decipher the recipe that will significantly improve completion effectiveness. Currently, as many as one-third of downhole stages are performing suboptimally, according to industry anecdotes. Furthermore, operators are seeking ways to increase hydrocarbon recovery, which still remains in the low- to mid-single digits of original hydrocarbon in place.
Since the first of the year, well stimulation services have been a part of the downhole tweaking process in completion practices. Anecdotes from the field reported to Hart Energy surveyors suggest operators are returning to slickwater fracture stimulation, which requires greater volumes of water and proppant, and are adding more stages per lateral packed closer together with a greater number of perforation clusters between stages. When combined, those factors create organic demand for proppant volume.
Regional examples of the evolving trend include the Eagle Ford Shale, where horizontal rig count remains virtually unchanged although the number of wells drilled has increased. Meanwhile, the play is expanding north and east toward the Eaglebine and operators are also looking at fracture stimulating carbonate formations such as the Buda and Austin Chalk. All of those factors combine to stimulate greater demand for pressure pumping services. Well stimulation providers are moving equipment into the region, while consolidation has occurred as larger service providers attempt to gain equipment, crews and customers by buying up smaller well stimulation providers.
According to the most recent Hart Energy survey, well stimulation providers have 2.4 million hhp in the region, up from the reported 2.1 million hhp at the end of 2013. The average number of stages per lateral has also increased, to 28 vs. 18 to 25 previously. Finally, the number of stages completed in a 24-hour period actually declined in the second quarter 2014, ostensibly because more sand is used per stage, slowing the process.
Five of eight survey respondents in the most recent survey expect Eagle Ford per-stage pricing to increase over the next 90 days on the basis of greater sand/proppant use and internal costs.
“The demand is high enough now that most providers are easing prices up to a manageable margin,” one mid-tier Eagle Ford service provider told surveyors. “Maintenance costs are high with slickwater fracks, and especially with increased use of 100 mesh sand.”
An average of reported per-stage pricing in the most recent survey came in at $86,500 for the Eagle Ford, up from the lower-$80,000 range at the end of 2013.
With the increase in pricing, well stimulation providers are seeing the first positive movement in operating income in a sector that had been operating at breakeven levels at various points over the last year.
Furthermore, smaller and mid-tier service providers are participating equally in market share gains, even as shares remain static for the large multinational firms.
The takeaway is that recent announcements on capacity additions among well stimulation service providers reflect greater demand for pressure pumping services caused in part by market tightness stemming from the switch to batch completions, as opposed to the concept that service providers are ordering equipment to replace equipment that is wearing out from attrition.
Operators have enjoyed the best of all possible worlds of late, with rising commodity prices and soft oilfield service pricing because of an oversupplied market. Operators routinely cite cost reductions of as much as 20% on horizontal wells over the last two years, with half of those savings coming from lower service costs in an oversupplied services market.
The change in pressure pumping pricing in the Eagle Ford Shale and other regional markets suggests inflationary pressures are poised for a return to oil and gas.
Contact the author, Richard Mason at firstname.lastname@example.org