Many U.S. exploration and production (E&P) companies may take a longer holiday break than usual this year, halting work crews beginning the week of Thanksgiving through New Year's Day, leading to more distress in the oilfield services industry, Fairmount Santrol Inc.'s CEO said Thursday.
Chesterfield, OH-based Fairmount provides sand and resin-coated proppant (RCP) used in hydraulic fracturing (fracking). As E&Ps began experimenting with sand volumes to improve productivity, the company expanded its operations in select areas of the country. It also expanded its railcar operations. But as producers have retreated from drilling, it's becoming more treacherous for suppliers, CEO Jenniffer Deckard said during a conference call to discuss third quarter results.
"As you've heard from most in our industry, a number of E&P companies are considering extending their holiday shutdowns from the week of Thanksgiving through the end of the year," she said. If that occurs, it would "make the back half of the fourth quarter especially challenging and volatile. We do expect these actions to result in lower overall fourth quarter profit volumes for both the industry and for Fairmount Santrol."
Carbo Ceramics Inc. CEO Gary Kolstad, whose company specializes in RCP, made similar comments during a third quarter conference call in late October. He said then that recent evidence was pointing to "E&P operators substantially reducing completion activity in the fourth quarter of 2015. As a result, our proppant sales volume in the fourth quarter of 2015 will likely decline significantly when compared to the third quarter of 2015. In addition, we will see some pricing pressure" in the final three months.
For Fairmount, business between July and September remained on a downward trajectory from the second quarter. The proppant solutions division's sand shipments fell 8% sequentially to 1.5 million tons. Raw frack sand volumes were down 6% sequentially, similar to the overall market, which declined an estimated 5-10%. RCP, more expensive than sand, saw its business off 25% from 2Q2015.
Across all of Fairmount's proppant solutions product lines, prices to sell the proppants also fell sharply from the second quarter, down 8%.
In response, Fairmount in early October idled a sand processing plant in Hager City, WI, and RCP operations in Cutler, IL. It also has deferred 2,300 railcar deliveries into 2017 and 2018, leaving it with zero car deliveries for 2016.
"We're seeing two things happen, I think, if we think about capacity," Deckard said. "We're seeing plants being idled and closed, and our estimates are that about 15% to 20% of the market has been either idled or closed. We also see the industry taking actions that are similar to Fairmount, which is reducing the effective capacity through workforce adjustments. So we are seeing a reduction in capacity in that way.
"As we think about consolidation, we certainly think that the industry could see some consolidation in the future." There could be consolidation through mergers/acquisitions "but we probably won't speculate on what that would be. We’ve seen some people with asset sales, and I'm sure the entire industry has seen that and we wouldn't be surprised if consolidation occurs."
The third quarter began with volumes and price levels "similar to second quarter averages, but significant pricing pressures late in the third quarter impacted quarter and volume levels and per ton costs." Fourth quarter frack sand volumes to date "have recovered nicely to above third quarter levels and early fourth quarter resin-coated volumes are up slightly from where we exited the third quarter," but "we expect the challenging market conditions to persist with significant added downward pressures for the second half of the fourth quarter."
Proppant volumes across the industry "may be down in the fourth quarter when taken in totality," Deckard told analysts. She wouldn't speculate about pricing in the second half of the fourth quarter. "What I will reiterate is that we believe that the industry is in a position...that these price levels really shouldn't be sustainable in the mid-term and that is, of course, barring any irrational behavior, but that is yet to be seen."