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Plunging rig count, frack fleets could spell disaster for oilfield services

Producers' sharp spending cuts in response to severely depressed crude oil prices could send U.S. rig and frack fleets lower at a historically rapid pace, driving a massive reduction in activity for oilfield services and drillers, analysts said.

"This will be an extraordinarily difficult period for oilfield services companies," Raymond James analyst Praveen Narra said in a March 23 note to clients. As the crude oil price tumbles, exploration and production companies are forecast to cut spending by as much as 65% year on year, which could send the U.S. rig count to low as 200 across key basins while U.S. frack activity could get hit even harder, Narra said.

Producers are seeking ways to cut budgets as they struggle to survive in the weak price environment. With little incentive to produce, they are looking first to cut completion activity as contract terms are generally flexible and job durations are commonly shorter than drilling, Narra said.

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Mark Rossano, contributing writer and analyst at frack data provider Primary Vision, said March 16 that about 10% of completion crews would pause work over the next month to assess the impact of the recent crude oil price decline, preserve cash and adjust drilling plans.

Since March 9, global oil prices have tanked due to the price war between OPEC and Russia, as well as demand destruction from the new coronavirus. West Texas Intermediate crude oil futures settled March 23 at $23.36 per barrel, declining 61.7% year-to-date. Brent crude oil futures closed at $27.03/bbl, losing 60.3% year-to-date.

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Showing the beginnings of a slowdown amid the deflated crude oil price, Primary Vision's data showed 280 fully utilized frack spreads operating across the U.S. as of March 20, down from an average of 300 in 2019.

Rossano said he expects completion slowdowns across all basins but expects the Permian, Eagle Ford and Williston basins will be the hardest hit as companies, including Diamondback Energy Inc., which has announced two capex cuts in the past month and has already announced a work stoppage, shutter completion activity. He said Permian work would decrease to about 120 spreads, Williston work will sink to 30 spreads and Anadarko will drop to 25 spreads.

Unlike completions work, which can turn off overnight, drilling activity will likely take several quarters to bottom, Narra said. Yet rig counts are declining at potentially the fastest pace ever, the Raymond James analyst said.

Rig data provider Enverus said the U.S. oil and gas rig count fell 22 on the week, to 813 in the week to March 19, as domestic upstream operators pullback in response to low crude prices and sharply reduced oil demand.

"Over the next few months, we expect to see continued declines from public and private operators alike across all L-48 basins as producers rapidly cut capex and halt drilling operations," analysts with Tudor Pickering Holt & Co. said in a March 23 note.

Based on a scenario where crude oil prices average below $25/bbl for the coming months, the rig count could decline until the first quarter of 2021, bottoming at under 200 rigs and averaging at 425 in 2020 and 225 in 2021, Narra said. Under a more optimistic scenario, where prices average around $33/bbl in the next nine months, the rig count could bottom at 390 rigs, and average 500 rigs in 2020.

"The rig count has historically seen significant volatility, and participants have seen significant activity changes. Even still, the pace of rig count declines is likely to occur at a pace we have not seen before," Narra said.

Combined, as completions fall faster than drilling activity, the number of drilled but uncompleted, or DUC, wells, which were expected to drawdown slightly in the first quarter, will instead begin a massive build in March that will balloon in the second quarter, Narra said. From the fourth quarter of 2019, 800 DUC wells could be added during 2020, the Raymond James analyst said.

The DUC backlog, which built during 2020, will give producers an "abnormally large backlog to complete in 2021 and 2022," which means budgets will focus on completions to maintain oil production or at least stem declines, Narra said.

But, "there is very little to be optimistic about regarding U.S. oilfield activity in the coming months," Narra said.

Credit Suisse analyst Jacob Lundberg concurred, "Investors and sell-side analysts are re-assessing the earnings potential and the survivability of companies across the oilfield services space," he said March 23. "Leveraged companies, particularly those with future refinancing needs, are underperforming their well-capitalized peers," he said. The trend could continue as long as the environment remains highly uncertain, Lundberg said.