As the oil price dropped through the first and second quarters of this year, oil companies closed in wells and laid off drilling and fracking crews. Activity bottomed in late May and has mounted a steady recovery in the months since. Rig count increases have been moderate, rising from low of 251 in May to 269 as of the 5th of October. What has been more spectacular is the increase in the deployment of frac crews as operators have allocated capex to bring Drilled by Uncompleted, (DUCs) out of inventory and into production. The graph above shows the true impact of this trend, with frac crews more than doubling since May’s lows.
The question before us now, is what can we expect through the rest of the year and on into 2021?
In a recent OilPrice article I documented a relevant industry consolidation move by Schlumberger, (NYSE:SLB) and Liberty Oilfield Services, NYSE:LBRT). I’ll let you follow the link provided for relevant details on the joint venture between these two companies. For a quick reference this creates the largest player in U.S. shale fracking with an estimated twenty percent of the available hydraulic horsepower, HHP in the industry today.
In this article we are going to concentrate on some broader industry trends and I will have an updated recommendation for shares of LBRT as well. I was cautious on LBRT immediately after this merger as the share rocketed 40% higher in a single day. That move wasn’t something I wanted to chase. As the chart below indicates this caution was well advised as the stock sold off over the next few weeks, before regaining most of its early value. Over the last week the market action has taken the general oilfield lower, and now we think that LBRT represents a compelling value at current prices.
The future of shale
Shale production has bounced higher with the DUC withdrawal of the last few months and is currently at 8 mm BOPD according to the most recent issue of the EIA’s 914. This is about 2.5-million BOPD higher than I had thought we would see earlier this year when in an OilPrice article I estimated that shale would exit 2020 around 5-6 mm BOPD. There is some noise in the data and the EIA 914 only has data through July.
Two things are clear from this data though. First, it is clear that DUCs are contributing new oil at a rate higher than the simple arithmetical average the EIA takes with the rig count divided by monthly production numbers. Second, this can’t be maintained. At some point the disparity between the frac count and the rig count will cause a sharp decline in shale production. I wasn’t wrong with the 5-6 mm BOPD estimate for shale production, just off on the timeline.
Related: The Next Couple Of Months Are Crucial For U.S. Oil
There is also another reason why the decline of U.S. shale will steepen. Up to now we have feasted on production from the very best acreage in shale plays. Referred to as Tier I, wells drilled in this rock are the most productive from a cost to drill, estimate of ultimate recovery-EUR, quality of hydrocarbons present-oil vs gas, and some other lesser factors. Henceforth oil companies are going to be forced to bring in wells from Tier II, and III, and these will simply not be as prolific as Tier I. This isn’t something technology-more sand per foot of interval, well spacing, 4D fracking, etc. can fix. This is just a physical reality.
A different way of looking at the data
Recently I ran across an article by Leen Weijers, Vice President of Engineering at Liberty. I am a data freak and am always looking at new ways of visualizing trends and raw data, and think perhaps we rely too much on the EIA simply because no one else puts out this kind of data, for free anyway. This article drew my eye as it correlated declining frac crew efficiency with the need for more crews to maintain production. Some of this is intuitive but it took an insider like Leen to crunch the numbers.
Source This graph depicts the increase in production vs the number of frac fleets over time.
Things get interesting in the next graph as it takes that data and applies a yearly focus to it. You can see that production rises from 2009, the year most people would say the “shale revolution” started, to the present day. Going from 1,500 BOPD in 2009 to over 12,000 BOPD in 2017. It also shows that since 2017 the rate of productivity per fleet has plateaued, or started a slight decline.
To what can we attribute this plateau, in spite of massive increases in frac stages pumped, optimizing well spacing, 4D fracking, and tons of sand placed into the reservoir per frac crew employee increasing by a factor of 12 over this period?
Leen draws a conclusion in the article-
“The reason for the production plateau since then is that frac crew…
Read More: Is U.S. Shale Finally Bouncing Back?