The US pressure pumping sector continues to deal with several headwinds including slowing activity, lack of access to capital, lack of support from public markets, and an ageing fleet. However, this week brought the first sign that much needed consolidation may be on its way.
Keane and C&J announced an all stock merger of equals valuing the combined company at around $1.8 billion.
This is a positive both for the pressure pumping sector as well as the OFS sector as a whole . In our opinion, the market should consider further consolidation. Whether this transaction touches off a wave of M&A remains to be seen and many such predictions have proved wrong in the past. All stock transactions are likely the only way major M&A takes place in the current environment with investors forced to wait to recover potential gains. Given the highly fractured OFS sector, at a minimum, these transactions can unlock significant G&A savings.
C&J and Keane’s merger makes good sense if for no other reason than size (and cultural similarities) matter. Both were grown during the shale boom primarily from acquisitions of Tier II and Tier III players and both have worked hard at achieving consistency of products and services.
Market dynamics in the pressure pumping space have changed dramatically over the last five years.
After five years of near continuous growth in frac intensities due to well lateral lengths, sand loadings, higher pressures and injection rates, growth has significantly slowed. Oil and Gas Operators have aggressively de-coupled frac services such as the supply of sand, diesel and chemicals. These services which were previously typically supplied by the pressure pumper are now in 70+ percent of wells being independently sourced by the E&P. This has been a major drag on per fleet EBITDA and played a significant role in pressure pumper’s degrading financial performance.
Pumping efficiency continues to increase as pumpers are pumping more hours per day due to industry trends. Trends such as longer wells, more stages and continued increases in pad drilling due to improved maintenance and operating techniques by the pressure pumpers themselves.
Pressure pumpers are facing significant headwinds.
Significant overcapacity remains in the market, while new equipment orders have slowed significantly, and retirements are well below levels previously forecast. Due to this, the average age of the frac fleet continues to climb. Pricing on a per-stage basis has eroded 12-15% since the second quarter of 2018. With US E&Ps facing strong headwinds in the near term, pricing is more likely to continue to erode than improve.
The market is beginning to see some much-needed consolidation, but new entrants continue to join the fray. Market dynamics are such that some small (1-3 spread) pumpers can quickly leverage personal connections to put new equipment to work. While this makes economic sense for these companies, the continued emergence of new entrants is damaging to the overall market.
There are still some levers pumpers can pull to improve financial returns.
Pumpers must focus on further improving pumping efficiencies on location, which is the primary driver of pumper profitability. Pressure pumpers must upgrade their fleets and focus on other ways to reduce repair and maintenance costs. While important for long term profitability, this is a difficult task in an environment with little financing available; where investors punish capex and new fleet additions (without retirements) would grow the oversupply. Pumpers should also focus on reducing the number of personnel supporting a fleet. Finally, pressure pumpers should consider utilizing select technologies to improve their overall performance to increase efficiency and decrease R&M cost.