43BloombergBusinessweek JJuly 27, 2020
drilling wells. It’s an expensive treadmill.
Seeking to make the most of their acreage,
producers started bunching wells closer and
closer together, the kind of idea that can look
better on a spreadsheet than in the Texas
dust. Those additional bores, known as child
wells, can interfere with output from the par-
ent well, leading to diminished profits and
wasted acreage.
Consider Permian driller Concho Resources Inc. To juice
production, the company last year crammed 23 wells onto
a single drilling location dubbed “Dominator,” with bores
spreading out underground like octopus tentacles. Concho
produced just a fraction of what it promised from those wells,
forcing it to dial back its 2019 production forecast. Its shares
fell 22% in a single day. Diamondback Energy Inc. encountered
a similar problem when a neighboring producer’s wells inter-
fered with its output, meaning the company wouldn’t meet
its forecast. Its stock plunged, too. Both companies’ shares
recovered some before the pandemic began.
It was yet another reason for investor exasperation. “How
companies still, after all these years we have wailed and
gnashed our teeth, manage to overpromise and underde-
liver remains an infuriating mystery,” analyst Paul Sankey,
now of Sankey Research, said in a note to clients. Since 2010,
U.S. producers have spent about $340 billion more than they
generated in revenue, according to Deloitte LLP. “In 2014 it
would have been better for investors to take their money, burn
half of it, and put the other half under their mattress,” says
Clark Williams-Derry, an analyst for the nonprofit Institute
for Energy Economics & Financial Analysis. “It’s not just bad
performance, it’s been epically horrible performance.”
The cheap capital that fueled shale’s rise dried up. IPOs and
follow-up offerings dropped to their lowest points in at least a
decade. Texas shale activity as measured by rig counts, drilling
permits, and well completions declined through much of 2019,
says economist Karr Ingham of the Texas Alliance of Energy
Producers. Producers kept squeezing pressure pumpers for
lower prices. By the end of 2019, at least two pumping com-
panies were exiting the business, and others, like FTS, were
laying off workers and seeking other ways to cut costs. Then
came the coronavirus.
ALMOST a quarter of Texas’ 242,000 oil and gas jobs have dis-
appeared. The state’s unemployment rate leapt to 13% in May,
from 3.5% at the end of last year. Houston alone has lost at
least 10,000 industry jobs and will probably see an additional
15,000 vanish by the end of the year, says Bill Gilmer, direc-
tor of the Institute for Regional Forecasting at the University
of Houston’s Bauer College of Business.
The pain is acute in West Texas, where pressure pumpers
and other service companies are the economic lifeblood of
towns such as Monahans, Kermit, and Pecos. “We have 200 cars
wrapped around our buildings every day of the week,” says
Libby Campbell, executive director of the West Texas Food
Bank. The bank distributed more than a mil-
lion pounds of food in June, twice the amount
of a year earlier. Many clients have never sought
public assistance before, Campbell says: “The
fear on their faces, it’s heartbreaking.” Hunt, the
Monahans banker, says: “Honestly, I haven’t seen
anybody stop paying me yet. I know the train’s
coming, I just can’t see how big it is.”
Texas oil people who’ve lived through past
busts remain resolute. This spring the Railroad Commission
of Texas, which regulates the oil industry, considered limit-
ing crude production in the hope of bolstering prices amid
the Saudi-Russia price war. Some Texans reacted with dis-
dain. “Texas, out of all states, represents a humble, steadfast
resolve that refuses to sacrifice its principles due to foreign
influence,” David Dale, a Houston-area land manager for oil
and gas producer Ovintiv Inc., wrote to the commission. Troy
Eckard of Eckard Enterprises LLC in Allen, Texas, told reg-
ulators that Russia and Saudi Arabia are “terrorists” whose
“gameofsupplyhostageisnotthetimetobowdownand
sellout.Lettheweakgobroke.Lettheoverpaid,poorly
runprivateequity-back[ed] companies fall by the wayside.
Leave us to our own free-market solutions.” The commis-
sion stood pat.
As oil historian Daniel Yergin has observed, companies go
bankrupt, rocks don’t. Assuming prices slowly recover, pro-
ducers will begin to turn wells back on—a process that’s never
been tried at this large a scale—and maybe drill some new
ones. Whether they start paying pumpers better remains to
be seen. Opportune LLP, a Houston energy advisory firm, says
pumpers and other service companies face “a test of surviv-
ability, not profitability.” Consolidation seems likely, with
producers themselves possibly acquiring the smaller service
companies on the cheap.
The Wilks brothers started a new fracking company,
ProFrac Services LLC, four years ago. The brothers also have
invested millions of dollars in shale drillers, four of which have
filed for bankruptcy.
On a Feb. 13 conference call, three analysts congratu-
lated Doss on FTS’s fourth quarter. Never mind that revenue
and earnings were way down from the previous year or that
the company’s market value was one-seventh what it was
12 months earlier. Things were better than expected in terms
of daily pumping hours and stages fracked per fleet. Plus, the
company had finally whittled the old LBO debt to a somewhat
manageable level. “The last 18 months have been challenging,”
Doss said, “but current indications are that we are beginning
to turn the corner.”
His tone was bleaker on his next quarterly call, on April 30.
By then, FTS had only four fleets in the field. “Even at our low
point in 2016, we still had 11 fleets operating,” Doss lamented.
Asked about the future, he said: “We definitely want to
come out of this. However long this downturn is—9 months,
12 months, maybe beyond—we want to come out of this.” <BW>
�With Catarina SaraivaDAN (LEFT) AND
FARRIS WILKS