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2019 was a difficult year for traditional pumping suppliers
30 December 2019IHS Markit Energy Expert
Figure 1:Total frac capacity in North America
2019-Q4 (forecast)
Financially, 2019 has been a difficult year to say the least for
pumping suppliers, and unfortunately the fourth quarter did not
allow them to end on a high note. Compared to the previous quarter,
IHS Markit estimates a decrease of demand to around 13.2 million
hydraulic horsepower (HHP), a change of about 10% when compared to
3Q19 HHP demand. The largest driver of downward demand currently is
the Marcellus, with an estimated drop of around 450,000 HHP; the
only silver lining for suppliers is that no such large changes are
anticipated for the next few quarters.
While demand decreased over 4Q19, perhaps the more significant
story has been that of decreasing supply, as pumping companies
continue to stack pumps, scrap aging equipment, and write off large
portions of their fleet. Schlumberger alone wrote off around $1.3
billion in pressure pumping equipment in 4Q19, and given no
anticipation of improving market conditions, 2020 could see similar
actions taken by other suppliers.
These actions are all a symptom of the high number of suppliers
in the market, where differentiation of services continues to be a
challenge given the fragmented competitive landscape. At this
point, pumping horsepower is essentially commoditized, and as a
result services continue to be fungible only to the extent that
providers are willing to race each other to the bottom on
price.
Indeed, pricing did not improve in 2019, and the pricing index
for the US market continues to stagnate at the mid-40s level. For
2020, changes in supply could drive prices upwards if more
equipment providers exit the market, however a significant
challenge will be managing the pricing expectations of operators
moving forward. Keeping in mind the current, bearish industry
sentiment, our conversations with some operators lead us to believe
they are expecting material price concessions off-the-bat from
suppliers for them just to have the hope of sticking around for the
year.
The one exception that we have observed is in electric-powered
pumping services, which are indeed well differentiated. While this
is still a very small piece of the overall market, the buzz these
services seem to be generating with operators points to them taking
a larger piece of the pie in the future. revenues.
This puts existing suppliers in a bind: they don't want to
invest the tens of millions of dollars in capex to establish these
electric fleets with so much of their conventional horsepower still
on the sidelines, but the operators looking for this type of
equipment don't care for excuses, they just want access.
That said, the established players in electric fracturing are
securing as much intellectual property as they can to prevent new
entrants to their turf, so perhaps the investment dilemma for
existing providers is a non-issue (at least until the patents run
out). Additionally, they are taking the prudent approach of not
building out more fleets until they have long-term contracts in
place guaranteeing their work. This strategy is in hopes of
avoiding the mistakes made over several boom-and-bust cycles by
traditional fracing companies. From our vantage point, if anyone
has any strength in the fracing market, it's these suppliers.
Figure 2:Partial Snapshot of e-frac cost comparison
app
Unfortunately given the current, depressed market conditions,
all the other, traditional horsepower providers will likely have to
work to leverage any differentiating factor in their arsenal (e.g.
safety record, internal relationships) with operators. The sense of
urgency hanging over them is real: overall utilization was 55% for
4Q2019, so the financial fuse is lit, and cash is burning quickly
due to idled crews.
In summary, if 2019 was challenging for pumping suppliers, 2020
could prove to be the true acid test that determines who sticks
around for 2021 and who exits the market permanently.
We provide full details of the hydraulic fracturing market in
our PumpingIQ report, which is open to subscribers of IHS Markit's
Onshore Services & Materials offering. Learn more about our PumpingIQ
service.
Jesus Ozuna is a Principal Research Analyst at IHS
Markit.
