Bloomberg Businessweek - USA (2020-07-27)

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BloombergBusinessweek July July 27, 2020

TWENTYyearsago,beforetheU.S.oilindustrybecamea

globalenergypowerthatstrikesfearintoSaudiArabia,broth-

ersDanandFarrisWilksstartedFracTechServicesLLCintiny

Cisco,Texas.Thecompanyprovidedequipmentforhydraulic

fracturing,akafracking,thebreakingupoftightsedimentary

rockbyblastingwater,sand,andassortedchemicalsthrough

horizontalboresatfantasticallyhighpressure.

FracTechgrewintooneofthemostsuccessfulpressure

pumpersastheU.S.experienceda boomfirstinshalegas,then

inshaleoil.TheWilksbrothersbecamebillionaireswhenthey

soldFracTechin2011,justasshaleoilwastransformingthe

U.S.intooneoftheworld’sbiggestproducersofcrude.Last

Septemberthecountrybecamea netexporterofcrudeand

petroleumproductsforthefirstfullmonthinatleast 70 years.

Thebigoilexplorersandproducersarehouseholdnames:

ChevronandBP,ExxonMobilandRoyalDutchShell.But

theU.S.oilrenaissancehasriddenheavilyonthebacksof

little-knownpressurepumpersthatfiguredouthowtoextract

oilfromthestubbornshaleofColorado,NewMexico,North

Dakota,Texas,andWyoming.Thecompaniesthatperform

thisgrimyworkarealsocentraltothepotentpoliticalnotion

thatAmericansshouldn’thavetorelyontheSaudis,Russians,

andotheroilproducersforpetroleum.

TodaytheWilksbrothers’formercompany,nowpublicly

tradedandnamedFTSInternationalInc.,is fightingtostay

alive.SinceearlyMarch,FTShasslashedexecutivepay,idled

almostitsentirefleetofpumpinggear,andlaidofftwo-thirds

ofitsemployees.It hasmoredebtthancash.Itsstockfellto

about30¢a sharebeforea 20-for-1reversestocksplitinMay.

Otherpressurepumpersaresuffering,too,withthousands

ofworkerslaidoff.ResearchfirmIHSMarkitLtd.recently

ponderedwhethercurrentconditionscould“createa sce-

narioinwhicha waveofbankruptciesinservicecompanies

leavesNorthAmericanshalewithoutenoughpumperstodo

theworkattoday’sstandards.”

Withpressuretomoveawayfromfossilfuelsrising,the

biggerquestionmaybewhethertheshalephenomenonitself

canendure.Alreadythisyear,morethanthreedozenNorth

Americanexplorers,frackingservicecompanies,andpipeline

operators—includingshalepioneerChesapeakeEnergyCorp.—

havesoughtbankruptcyprotection.Productionis downabout

2 millionbarrelsa dayfroma peakofalmost 13 millionearly

thisyear,andMorganStanleysayspricesmustgohigherthan

thecurrent$40a barreltopreventfurtherproductiondeclines

in2021.Futurespricesneedtosettleinthe$55-to-$65-a-barrel

rangeforanextendedperiodbeforenewdrillingpicksupsig-

nificantly,saysresearchfirmEnverus.Eventhen,manycom-

paniesaresohighlyleveragedthatmuchoftheircashcouldgo

toreducingdebtratherthanextractingoil.

Shale’swoesareconnectedtopandemicshutdownsevis-

ceratingdemandandtheSaudi-Russiapricewarthatbriefly

pushedoilpricesbelowzero.Buttheshaleindustry’sown

shortcomingshadgottenit intotroublebeforeCovid-19,asa

lookatFTS’swindingjourneythroughtwinboomsandbusts

makesclear.Nowa cruciallinkintheU.S.oilsupplychainis

facingmassextinction.

INDecember2010,FracTechfiledwiththeU.S.Securities

andExchangeCommissionforaninitialpublicoffering.The

prospectusdescribeda verticallyintegratedcompanythat

notonlydispatchedcrewstofracturehorizontalwellsfor

oilandgasproducers,butalsomanufactureditsownequip-

ment,minedfrackingsand,andmanageda logisticsbusi-

nesswithmorethan1,000railcars.Thisnewmethodoffossil

fuelextractionwasgoingfullblastinnaturalgasandgaining

momentuminoilasproducersfeastedoncheappostrecession

capitaltospendondrilling.

FracTechnotedinitsprospectusthatit benefitedfroma

“tightsupply”ofcompetitorsandampledemand.Insome

drillinglocations,FracTechoperatedaround-the-clock,using

twindayandnightcrews.ThelateAubreyMcClendon,chief

executiveofficerofChesapeake,whichowned26%ofFrac

Techandwasa regularcustomer,calledthecompany“the

bestinthebusiness.”

Thefollowingspring,FracTechcanceledtheIPO.It then

closeda leveragedbuyoutthatdeliveredthecompanytoa

groupofinvestorsledbyTemasekHoldingsPte,a Singapore

stateinvestmentcompany,andRRJCapital.Chesapeake

increaseditsstaketo30%,andtheWilksespocketedmorethan

$3billion,someofwhichthey’veusedtoacquirevasttractsof

landinMontanaandIdahoandtosupportanti-abortion and

other conservative causes.

Frac Tech’s annual revenue had risen sixfold in four years,

to $1.3 billion, and its net income had quadrupled, to $369 mil-

lion. Crude prices had hit $100 a barrel, and shale was a happy

business. Blue-collar workers looking to earn $100,000 a year

flooded into West Texas. RVs and “man camps” housing out-

of-towners stacked up around the little towns. Monahans, with

a population of 7,000, saw that “probably double,” says Todd

Hunt, CEO of Tejas Bank there. “License plates from all over

the United States.”

It didn’t matter much in places like Monahans, but frack-

ing was a hot political issue. Environmentalists raised con-

cerns about air and groundwater pollution linked to fracking

chemicals. Natural gas generated as a byproduct of fracking

often goes to waste as oil producers burn it off through a pro-

cess called flaring. Last year enough gas was flared in West

Texas’ Permian Basin alone to power 5 million U.S. homes.

Sharon Wilson, senior field advocate for the nonprofit

IF PRICES DON’T RECOVER BOTH

DRAMATICALLY AND QUICKLY, THE

ERA OF SHALE OIL MIGHT COME

TO A SHUDDERING END

By Bryan Gruley, Kevin Crowley,

Rachel Adams-Heard, and David Wethe

JULIE DERMANSKY