Frac Horsepower Utilization Falls Alongside Sand Demand

Satellite imagery and photos of stacked frac fleets across major oil- and gas-producing shale plays in the U.S. show the pain oilfield service providers are experiencing.

Sand mines are at risk as more than a dozen such facilities in the Permian Basin alone have a status of intermittent or nonproducing.

This, according to analysts at Westwood Global Energy Group, comes as U.S. oil and gas companies cut spending in response to low commodity prices, driven down by a supply-demand imbalance due in part to the OPEC+ fallout and a global pandemic that slowed travel.

The firm’s data show 43 E&Ps have lowered capex by $51 billion. The reductions came amid fear of global oil storage reaching capacity as WTI prices fell into negative territory last month.

But there are signs of a recovery: oil prices are inching higher and COVID-19 shelter-in-place orders are being lifted—though some health experts warn of the potential for new outbreaks.

Market research suggests balance will be achieved by third quarter this year, said James Jang, lead analyst at Westwood.

“The speed of U.S. and Canadian supply reduction really surprised many of the OPEC+ nations,” Jang said on a recent webinar. “North Dakota’s Williston Basin output has dropped by nearly one-third, or about 400,000 barrels per day, since March. In Texas, the output is expected to drop by about 20%, or about 1 million barrels per day, by the end of May.”

Some of the biggest planned production cuts are from ConocoPhillips Co., Exxon Mobil Corp. and Chevron Corp.

“It’s estimated that April was the inflection point with a mindboggling 30 million barrels per day of demand drop,” Jang said. “Significant supply cuts are being made by most producing countries,” including Saudi Arabia, Russia and the U.S.

Small E&Ps have cut their spending in the U.S. by 42% (accounting for 2% of the total reduction), compared to 37% spending cut by independents and 22% by supermajors, he said.

The cuts, however, have dealt frac companies a blow.

Horsepower utilization for six companies providing services in the U.S. onshore has dropped to an average of about 25%, Westwood analyst Luke Smith said.

“FTSI (FTS International Inc.) had quite a significant drop off going from about 70% [in third-quarter 2019] down to about 20% for Q2,” Smith said, later showing SatScout imagery of stacked fleets in West Texas and Oklahoma. “Halliburton, the largest U.S. onshore pressure pumper, had essentially about 61 active frac crews at the end of 2019 … and that number has been significantly diminished, especially in the Permian.”

The story was similar for others such as Liberty Oilfield Services Inc., NextTier Oilfield Solutions Inc., Patterson-UTI Energy Inc. and Schlumberger Ltd.

HHP utilization varied by basin.

“When we take a look at Appalachia we see that it already had a lower utilization than [the] Eagle Ford and the Permian,” Smith said. “That’s largely due to prices and storage in the natural gas market. The Q2 drop off in Appalachia isn’t quite as severe as what you see in the Eagle Ford and the Permian,” where he added companies like Parsley Energy Inc., Diamondback Energy Inc. and EOG Resources Inc. essentially took off the month of April.

Lingering in the background of market turmoil, Smith said, is how efficiency gains—such as improving the amount of time crews can frack wells—impacts utilization. “These frac crews can pump more stages per quarter. They’re essentially putting in more proppant, and they’re kind of diminishing their demand,” he said, noting big efficiency gains in Appalachia and Eagle Ford.

Westwood’s data show stages per crew in Appalachia jumped from 200 in 2018 to nearly 400 this year. Stages per crew jumped to just over 500 from 300 in the Eagle Ford during the same period.

A sharp drop in frac sand supply and demand is also playing out, according to data from Jonathon Clark, the firm’s lead analyst for frac sand.

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“In Q2 we are expecting to see both supply and demand reach a historic low on a quarterly basis and, in terms of overall demand, we are estimating the Lower 48 total demand to decline by roughly 51% this year compared to 2019,” Clark said.

The firm tracks about 180 mines, of which roughly two-thirds are in the Midwest and Permian, that accounts for about 280 million tons of annual nameplate supply. Reduced activity in shale plays have put mines at risk.

In the Permian, average mine utilization is expected to drop to about 40% in second-quarter 2020, down from more than 70% in the first quarter, Westwood data show.

Clark said the firm is tracking 14 operations in the Permian Basin with mine status as intermittent or nonproducing.

Mines are also at risk in the Eagle Ford, where average mine utilization is forecast to drop to around 60% in second-quarter 2020, down from 100% in the first quarter. Here, Westwood is tracking five operations with mine status as intermittent or nonproducing.

Despite the bleak outlook, Westwood sees a near-term opportunity for mobile mini-mine operators, particularly in the Eagle Ford, Delaware Basin and Appalachia. Advantages such as the ability to move with frac crews from well to well and place sand when and where needed among other plusses could improve efficiency and lead to cost savings, according to Clark.

“With all that being said, we do feel that there will be some recovery, particularly in the later summer months and into Q4,” Clark said. “But we will definitely see Q2 take a hard fall in terms of supply and demand.”