With financial stress setting in for U.S. shale companies, some are trying to drill their way out of the problem, while others are hoping to boost profitability by cutting costs and implementing spending restraint. Both approaches are riddled with risk.
“Turbulence and desperation are roiling the struggling fracking industry,” Kathy Hipple and Tom Sanzillo wrote in a note for the Institute for Energy Economics and Financial Analysis (IEEFA).
They point to the example of EQT, the largest natural gas producer in the United States. A corporate struggle over control of the company reached a conclusion recently, with the Toby and Derek Rice seizing power. The Rice brothers sold their company, Rice Energy, to EQT in 2017. But they launched a bid to take over EQT last year, arguing that the company’s leadership had failed investors. The Rice brothers convinced shareholders that they could steer the company in a better direction promising $500 million in free cash flow within two years.
Their bet hinged on more aggressive drilling while simultaneously reducing costs. Their strategy also depends on “new, unproven, expensive technology, electric frack fleets,” IEEFA argued. “This seems like more of the same – big risky capital expenditures.”
EQT’s former CEO Steve Schlotterbeck recently made headlines when he called fracking an “unmitigated disaster” because it helped crash prices and produce mountains of red ink. “In fact, I'm not aware of another case of a disruptive technological change that has done so much harm to the industry that created the change,” Schlotterbeck said at an industry conference in June.Related: Will The U.S Gas Glut Cap Oil Production?
Not doomed, just mismanaged. Consolidation will be the remedy.
See Callon merging with Carrizo (or buying them out) and Anadarko getting swallowed up by OXY (despite Icahn opposition) More of this coming with Endeavor (in the Permian) on the block and the big boys (i.e. Shell, BP, ExxonMobil) circling it as they evaluate best purchase price. Pioneer also on the block to be swallowed up by a big player.
Personal opinion - once areas like the Permian are controlled by several big players, they can better dictate prices to contractors to drive down costs. Good for operators - bad for contractors.
In addition to lower field service and material costs, I think the majors will manage production volume much better stabilizing prices and maintaining returns acceptable to investors.
Good point. The private equity based companies will be losing areas where they used to thrive. There is already a shrinkage of PE firms as the big investors "compact" their portfolios.
I see a couple of fracking rigs in storage nearby. But then FracTech has a big office here. So I expect seeing a couple Haliburton rigs sideline is no big deal. Fracking is not dead but is continuing to evolve as it has for the last 70 or more years.