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Decline in frack activity putting strain on US services companies, analysts say

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Decline in frack activity putting strain on US services companies, analysts say

An ongoing decline in drilling and completion work continues to undercut U.S. oil and gas production growth — a trend that could hurt oilfield services companies into 2020 as analysts expect producers to remain prudent in their spending. However, a declining rate of production from mature wells may help boost demand for new fracking fleets farther down the road.

"U.S. land sentiment continues to weaken, with some now questioning the extent of recovery in 2020," Goldman Sachs analysts said in a Sept. 27 note following a recent visit with Houston investors.

Angie Sedita, an oil services analyst with Goldman Sachs, said frack activity remained under pressure in September and could continue to slide through the end of the year. "The debate now is not around Q3, but the outlook for Q4 activity," she said.

In response to weak commodity pricing and calls for better shareholder returns, producers have been tightening budgets all year, which has slowed drilling and completion activity, the analyst said.

"We believe the [frack] activity has steadily declined over the course of Q2 and that pricing remains under pressure," Sedita said.

Fracking activity typically increases in the fall but a ramp-up is not expected this year, energy analyst Mark Rossano said in a Sept. 9 report for Primary Vision, a frack data and consulting firm.

One industry insider recently surveyed by the Federal Reserve Bank of Dallas said industry-wide drilling-and-completion capital expenditures could decline by about 10% in 2020.

With fewer investment dollars flowing into the sector, Rossano said U.S. frack activity continues to decline across the U.S. He estimates active spreads fell from a peak of 482 in early April to 395 by the end of August, with the most significant declines seen in the Permian, where spreads were reduced by approximately 25.

Analysts with Tudor Pickering Holt & Co. agreed that the decline in U.S. frack activity accelerated in September. The investment banking firm estimates the U.S. active frack spread count declined by nearly 9%, or by about 30 spreads, between August and September, compared to a month-on-month gain of four spreads during the same period in 2018. The Marcellus, Haynesville and midcontinent shales accounted for more than 70% of the month-on-month declines, the Tudor Pickering Holt analysts said Sept. 25.

"Should Q4'19 play out similarly to Q4'18, we could see 2019 conclude with ~250-260 frac spreads running (yikes!)," the analysts wrote.

Whether or not tighter producer spending is weighing on the U.S. frack spread count, analysts agree the reduction in drilling and completion activity is hitting oilfield services companies in the U.S. land markets especially hard and that reversing the cycle will take a shift in the market and an effort by oilfield services companies themselves.

"Oversupply of hydraulic fracturing capacity and reduced activity by customers have put extreme pressure on pricing. Most hydraulic fracturing providers feel that the current pricing is unsustainable over the medium to long term," said a respondent in the Federal Reserve Bank survey.

Tudor Pickering Holt said Sept. 19: "It would appear that we need (stout) demand growth and/or (prodigious) fleet attrition before frac supply falls below demand and the market can improve." The analysts noted customers prefer higher-end high horsepower, which might help drive some attrition through the scrapping of older, Tier 2 pumps.

Meanwhile, a declining rate of production from mature wells may help boost demand. According to the latest "Drilling Productivity Report" from the U.S. Energy Information Administration, legacy oil well production in the Permian Basin is expected to decline 267,000 barrels per day from September to October while production from new wells is expected to climb 338,000 bbl/d, equating to a net month-on-month increase of just 71,000 bbl/d.

The EIA projects the Eagle Ford Shale and the Anadarko Basin should see production decline through October, placing both regions in multi-month downturns.

The Eagle Ford could see some reactivation of crews in the fall, Rossano said. However, completion crews will trend closer to 2017 versus 2018 as producers evaluate drilling programs and ways to reduce cost while maintaining production targets, he said.