The pressure pumping industry is becoming more efficient and learning "to do more with less," adding overall capacity for hydraulic fracturing (fracking) operations but also oversupplying the market and keeping pumping prices competitive for the next 12-18 months, according to analysts at UBS Securities LLC.
In a report released Monday, analysts Angeline Sedita, Sasha Sanwal and Paul Choi said faster fracking crews, design and engineering improvements and continued growth in 24-hour operations has made the pressure pumping industry more efficient in 2013.
According to the analysts, the pressure pumping industry started 2013 with 20-25% excess capacity, with a well count that was forecast to grow 8-10%. But today the industry has the same, if not more, idle pressure pumping equipment as it had at the beginning of the year.
"We believe there is not only 'rig efficiency' but 'frac efficiency,'" the analysts said, adding that they don't believe the growth in pressure pumping capacity is over. "[It] could even grow more rapidly as the industry continues to hone its execution.
"Even measured in months, the industry is able to do more with less. We can complete twice as many frac stages as only six- to nine-months ago, perform the job more quickly and efficiently, better design a frac job and still manage to use even less and less horsepower than before."
The analysts added that under normal circumstances a fracking crew is able to keep pace with two to two-and-a-half onshore rigs drilling new wells, but today a crew can keep pace with four rigs. Pad drilling and so-called "zipper fracking" is also affecting the outlook, but the analysts said larger oil service companies would fare better under the current environment.
"Frac pricing is still under pressure in some basins and has yet to bottom, nor will we call when the bottom will be," the analysts said. "In this market, only the companies which are able to continue to cull costs can drive margin gains. Smaller and less efficient companies will be unable to reduce costs much more than they have already."
The analysts estimate that at least another 10-15% of new "virtual" pressure pumping capacity is entering the market, possibly more. They added that they believe "true" pad drilling is currently only around 20-30% of onshore drilling in the U.S., but predicted it will increase to around 50% within the next 12-15 months.
"We expect the relative drilling intensity within a pad to increase," the analysts said. "Our channel-checks suggest that an average of around three wells is currently being drilled on each pad. This will likely increase to an average of about four to five wells per pad driven by increased pad activity in the Eagle Ford and Permian.
"All of this tells us that pressure pumping pricing will remain competitive for the next 12, potentially 18 months. Only a meaningful recovery in natural gas prices could reverse the scenario, and we are certainly not predicting a natural gas recovery."