Houston-based Superior Energy Services Inc., which provides drilling, completion and production-related needs worldwide, is expecting a contraction in U.S. land operations into 2019 on an overabundance of hydraulic fracturing equipment and withering completions demand.
During a conference call Tuesday to discuss 3Q2018 results, CEO Dave Dunlap laid out the feast-or-famine tale in the U.S. onshore and in particular the Permian Basin, where talent and equipment swarmed to extract huge amounts of oil and natural gas, only now to face a dearth of pipeline capacity.
“There's definitely a higher degree of uncertainty surrounding U.S. land markets over the coming quarters primarily as it relates to completions activity,” Dunlap said. “Current fracturing supply and demand dynamics have caused spot market pricing to erode rapidly.
“For some time, we have used the spot market as an outlet to secure utilization when one of our primary customers reduced activity for short periods of time. It is increasingly unlikely when we do have brief periods of availability on our calendar, we will participate in the spot market until pricing and competitor behavior improves, opting instead not to run our equipment at suboptimal pricing.”
The biggest issue is in the biggest basin, the Permian, where growth has paused, “resulting in near-term oversupply of hydraulic fracturing capacity, which has impacted pricing and fleet utilization,” the CEO said. His comments mirrored those by the CEOs of Schlumberger Ltd. and Halliburton Co. during their 3Q2018 conference calls.
“Combined with the likelihood our customers will reduce activity levels during the coming holiday season, it is likely that fourth quarter utilization and results in fracturing are below third quarter levels,” Dunlap said.
And 2019 is uncertain.
Customers “espousing a capital discipline and return orientation have yet to disclose 2019 operating plans. There also remains a range of potential logistical and supply chain inefficiencies that could limit activity growth over the near-term. As a result, we can't know when to expect the next leg of growth but we are confident that substantial activity growth can occur in U.S. land markets at some point during 2019.”
Superior is fielding requests for 2019 completion services by its exploration and production (E&P) customers, “despite the reported demise of the Permian Basin,” where most of the future work would be.
“It is likely that we have more horsepower working in the Permian during 2019 than we do today. Regardless of one's convictions, the service opportunity in the Permian Basin is extremely nuanced, and I would caution anyone from using wide generalizations to characterize the market over the coming quarters.”
The slower pace of capital equipment investments today in U.S. markets eventually should balance supply and demand when E&P activity again escalates.
“Clearly, our operators are going to be working with increased budgets in 2019,” Dunlap said. “We've got a higher oil price. Higher oil prices, higher realized oil prices and a differential in the Permian Basin that should be diminishing as we get some pipeline capacity all points to increased E&P spend...And I think it's going be largely geared toward the Permian Basin.”
The fourth quarter as usual is going to be pressured by a pullback during the holidays and expected inclement weather. Because January and February historically also are burdened by inclement weather, “I'm going to be a bit surprised if we see a right angle of change in activity levels during the first quarter,” said the CEO. “I'm biased to think it happens more likely at some point during the second quarter, a little bit closer to where we begin to see pipeline capacity improve...It's all a bit uncertain at this point.”
The pause in U.S. completion activity, which “may extend for several quarters, is just that, a pause,” Dunlap said. Growth should resume “at some point in 2019.”
While the forecast looks tight for U.S. land completions, “the fact remains that our pressure pumping margins have improved more than 70% from year-ago levels,” with total U.S. land margins increasing 45%-plus from a year ago.
Results overall are improving “in what can only be considered an extremely competitive U.S. land market,” Dunlap said. Market recovery, however, “is taking longer than we would like.”
The market dynamics affecting Superior’s hydraulic fracturing margins didn't seem to impact several other product and service lines in U.S. land markets, including premium drill pipe, bottomhole assemblies, fluid management and a number of our production-related services.
In fact, premium drill pipe in the United States is for “all practical purposes sold out,” Dunlap said. “We have spent more from a capital standpoint on additional assets for the U.S. land premium drill pipe market this year than we intended to begin the year. In fact, about twice as much capital has gone into premium drill pipe as what we budgeted for the year.” Superior’s capital is being rationed to product lines that offer the “best and most meaningful earnings improvement and return for us, and premium drill pipe is at the top of that list…
“I think in 2019 we'll have additional capital going into premium drill pipe,” which is the “only area” where there has been growth investment. “Premium drill pipe is one in the U.S. land market that I think will continue to attract capital for us.”
Onshore completion and workover services, comprised of product lines that exclusively serve U.S. land markets, saw a sequential revenue increase of 7% to $295 million, said CFO Westervelt T. Ballard.
“A greater than anticipated percentage of our hydraulic fracturing work is now being conducted as multi-well pad or zipper operations,” Ballard said. “This increases the volume of sand that we can pump and also increases the horsepower requirements to operate efficiently.”
In addition to higher horsepower requirements, the “near-perpetual nature” of fracturing operations has required Superior to add ancillary equipment, including zipper manifolds and treating iron on each job pumped at higher rates for longer periods of time.
The Permian’s “poor” water quality is causing wear and tear on equipment, particularly in the Delaware sub-basin, Ballard said.
“Oftentimes we are also encountering exceedingly poor water quality, in many areas where our customers operate, which has an adverse impact on our equipment. These factors caused increased repair and maintenance expenses during the quarter.”
These types of operations help differentiate Superior’s services, but “ultimately, higher prices will be required to reflect the increased repair and maintenance demands placed on our equipment from higher levels of service intensity.”
Superior also reported stronger activity in the Gulf of Mexico (GOM) via its drilling and completion product lines, giving it earnings leverage in the global markets as the recovery continues.
In addition, the competitive landscape internationally “is generally favorable for us and signs of potentially meaningful recovery in markets such as Latin America and Asia Pacific are emerging,” Dunlap said.
Net losses overall from continuing operations in 3Q2018 improved year/year and sequentially to nearly $22 million (minus 14 cents/share) from $57 million (minus 37 cents) in 3Q2017 and $25 million (minus 16 cents) in 2Q2018.
Total U.S. land revenue was higher at nearly $397 million from $375 million a year ago and from $331 million in 2Q2018. GOM revenue also increased to $90 million from $72 million in 3Q2017 but sequentially it was down from nearly $92 million. International revenue climbed year/year and sequentially to $573 million.