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BloombergBusinessweek JulyJuly 27, 2020Earthworks, argues that shale has worked against U.S.
energy independence. “Rather than having a managed
decline of oil and gas as we build out renewable energy,
now we’ve got chaos,” she says. “We’re probably less inde-
pendent now than if we had used this time to transition to
renewable energy built in the USA. People would be better off
healthwise, and we wouldn’t be dealing with this awful bust.”
In the early days, shale oil producers seemed like miracle
workers. They could get wells flowing in mere weeks, while
offshore projects took years. Shale wells delivered big initial
bursts of oil, helping producers grow at copious rates. Wall
Street had almost endless patience. Instead of earnings and
cash flow, investors focused on whether you hit your produc-
tion estimates. “It was all about, Let’s grow this as fast as pos-
sible,” says analyst George O’Leary of Tudor, Pickering, Holt
& Co. “I’ve got to drill like crazy for five years, and if prices
are at $100, I’m going to make a mint.”
By late 2011, Frac Tech was running 33 pumping fleets of
flat-bed trailers, high-powered pumps, water trucks, diesel
engines, sand trucks, gauges, pipes, hoses, and crew. More
than half its business was with so-called dedicated customers
like Chesapeake—those that prebooked Frac Tech crews for
use on the bulk of their projects. In September, Frac Tech’s
new owners filed for an IPO and announced the name change
to FTS.
The IPO never happened, and this time it wasn’t because
there was a better deal elsewhere. The leveraged buyout had
loaded more than $1 billion in debt on FTS, and the company
wasn’t making enough money to service it. Not long after the
buyout, a natural gas glut sent prices into a free fall, and FTS’s
customers began cutting capital outlays. The costs of running
the business were rising, too, especially that of guar, a bean
used to thicken fracking fluid. As producers shifted to oil,
new pressure pumpers piled in, giving producers leverage to
reduce what they were willing to pay for pumping. Dedicated
customers became less dedicated. In retrospect, the Wilks
brothers couldn’t have timed their deal much better. They
bid farewell to their baby as just about everything that made
pumping so lucrative was about to change.
Within 18 months of the buyout, Standard & Poor’s cut
FTS’s credit ratings, investors pitched in money to keep the
company from violating debt agreements, and the CEO, a for-
mer McClendon underling, was replaced. The LBO borrowing
wasn’t intended to be permanent, rather a sort of bridge loan
to sustain the company until it could execute a proper offer-
ing. But the acquirer’s expectations for growth, reflecting the
industry’smood,turnedouttobetooexuberant.
With oilprices slippinginlate 2014,theworld’soil-
producing nations looked to the Saudis to cut production
and keep prices up. The Saudis declined, having given up all
the market share they were willing to. Crude prices bottomed
out at about $30 in 2016. Producers cut back on drilling, and
some pressure pumpers went out of business. FTS, after refi-
nancing $1.1 billion in debt in 2014, managed to hang on.
Company executives declined to be interviewed for this story. MAJORIMAGES;DATA:PRIMARYVISION,U.S.ENERGYINFORMATIONADMINISTRATIONBy late 2017 crude was in the $60-a-barrel range and the
shale oil boom was officially back on, with the Permian
Basin the favored place to drill. FTS had survived the bust,
rebounded under another new CEO, Michael Doss, and was
preparing yet again for an IPO. Across the shale world, a sort
ofamnesiasetin.THEarchetypeoftheAmericanoildrilleris theflag-waving,
hell-raising Texas wildcatter looking high and low for his next
gusher. Shale supposedly made the caricature obsolete: Who
needs a wildcatter when everyone already knows where to
find the oil?
Pressure-pumping fleets are essentially mobile factories,
and like any other factory they make money only when they’re
active. Generally they’re paid by the stage—a length of a hor-
izontal bore, usually about 200 feet long, through which a
pumping crew blasts water and sand. The bores themselves
can extend laterally for 2 miles.
With oil prices healthy again, drillers cranked up rigs, private
equity money poured in, and pressure pumpers and related
oil-services firms went public. FTS went into its February 2018
IPO after tripling revenue in 2017, to $1.5 billion, reactivating a
bunch of fleets, and generating positive operating income for
the first time since 2014. The company had raised its pumping
prices by 56% on average in 2017. However, in a conference call
with industry analysts in March 2018, Doss said pricing was get-
ting competitive again, noting, “There are new [pumping] fleets
coming into the market.”
Despite a winnowing during the bust, FTS was still vying
with about 40 rivals. As they started redeploying, the supply
glut forced pumpers to make price concessions, contributing
to drops in FTS’s revenue and earnings later in 2018. Producers
by then were paying about $50,000 a stage, less than half what
they paid in 2011, says Daniel Cruise, founder of Coras Research.
As prices fell, another threat arose: Wall Street was run-
ning out of patience with shale. The economics of shale oil and
conventional oil are as different as the drilling methods them-
selves. After their early surge of output, shale wells trickle out
more rapidly than conventional vertical wells in what’s known
as the decline curve. Flows from conventional wells tend to
fall 5% to 10% a year, while a shale well can lose as much as
65% of its production by the end of its first year.
To keep production numbers high, shale companies keep7/19/19 7/17/204002000ACTIVE PRESSURE-PUMPING
FLEETS IN THE U.S.7/19/19 7/10/2013m121110U.S. CRUDE OIL PRODUCTION,
BARRELS PER DAY