Secret to making money while fracking for oil? Simply stop fracking. “The catch is that production will immediately move into steep decline in many cases.”

Superior Energy Services latest casualty of ‘fracking’ market downturn by Liz Hampton, Dec 16, 2019, Reuters

Oilfield service company Superior Energy Services Inc. on Monday said it will shutter its hydraulic fracturing unit, the second supplier this month to exit a business hammered by slower shale activity.

Last week, Basic Energy Services said it would sell most of its hydraulic fracturing equipment for between $30 million to $45 million, citing weaker activity and pricing that inhibited “the potential for positive free cash flow in the near- to medium-term.”

Oilfield service companies have been hard hit this year by weak oil and gas prices and spending cuts by producers shifting to focus on shareholder returns via cost-savings over production growth.

… Consultancy Primary Vision Inc. estimates some 150 hydraulic fracturing spreads, which are used to complete oil wells, have been taken off the market since April.

Earlier this month, Superior said it was cutting 112 Pumpco jobs in West Texas. The company anticipates a $45 million pre-tax charge to earnings from a reduction in the value of its assets and will use proceeds from the divestiture to pay down debt, it said in a regulatory filing.

Pumpco had about 13 fracking spreads with roughly 650,000 hydraulic horsepower, while Basic had about 11 spreads with 500,000 hydraulic horsepower, according to Primary Vision.

“We are seeing the impact of the collapse of the Midcontinent’s drilling programs,” said Richard Spears, vice president of consultancy Spears & Associates, referring to oilfields in Kansas, Oklahoma, Louisiana and Texas. “The rest of the industry is so weak that there is no place to move frac equipment to where it could be employed.”

Oil production in the Anadarko Basin, which spans Oklahoma and parts of Texas, is expected to fall by 12,000 barrels per day this month to 551,000 bpd, according to the U.S. Energy Information Administration. The Eagle Ford shale in South Texas is also expected to suffer a production decline, according to the EIA’s latest Drilling Productivity Report.

Earlier this month, top fracking provider Halliburton Co closed its Oklahoma office and laid off hundreds of workers.

Spears said many fracking companies have been hurt by oil companies buying sand and chemicals directly from suppliers rather than from oilfield service firms.

“Taking those away from the frac service company evaporated the profits that allowed the service companies to reinvest in growth or survive a sustained downturn,” he said.

Energy Analysts Deliver More Bad News for US Fracking Industry’s Business Model by Justin Mikulka, December 17, 2019,

This month, the energy consulting firm Wood MacKenzie gave an online presentation that basically debunked the whole business model of the shale industry.

… For an industry that has raised hundreds of billions of dollars promising future performance based on the production of a few wells, this is not good news. And particularly for the Permian, the nation’s most productive shale play, located in Texas and New Mexico.

Up until now, the basic premise of the fracking business model has been for a company to lease some land, drill until finding a high-volume well, hype to the press this well and the many others it plans to drill on the rest of its acreage, and promise a bright future, all while borrowing huge sums of money to drill and frack the wells.

… Shattuck called out how the old business model of firms borrowing money from investors while hoping for future payouts on record-breaking wells no longer works. He summed up the situation:

“We’re transitioning to a point in time, where the investment community was enamored of the next well and how big it might be. That has changed for a variety of reasons. One very important reason is the next well might not be bigger. It might be smaller.”

The fracking industry is now being asked to produce positive financial results — not just promises of new super wells, or cube development, or artificial intelligence. And yet the industry couldn’t deliver profits while drilling all the best acreage over the last decade. Now, shale companies need to do that with oil wells that may not produce as much.

Seven years ago, Rolling Stone referred to the fracking industry as a “scam” while profiling the “Shale King” Aubrey McClendon, the man generally credited with inventing the business model the shale industry has used the past decade. Today, McClendon’s old company Chesapeake Energy is in danger of going bankrupt.

Perhaps investors are finally catching on.

Are Child Wells the New Normal?

Last year I covered the issue of child wells, or secondary wells drilled close to an existing “parent” well, and the risk they posed to the fracking industry. Child wells often cannibalize or damage parent wells, leading to an overall drop in oil production.

… Over a year later, has the shale oil industry abandoned this approach or are child wells still an issue?

During this month’s webinar, Ben Shattuck answered that question, making a statement that should strike fear in the heart of shale investors and the owners of all this shale acreage:

“We know we’re on the cusp of a child-well world.”

One of the biggest problems with fracked oil well production is child wells, and according to Shattuck, that looks like the new normal. When the bug in an unprofitable business becomes the main feature of the business model, its future is definitely at “risk.”

Fracking’s Fatal Catch-22

As long as shale firms could keep borrowing and losing money to drill new wells, producing more oil was simple. When profits weren’t a concern, the debt-heavy business model worked. But similar to the dot com boom and bust, the fracking industry is learning that if you want to stay in business, you need to make a profit.

Without a doubt, drilling and fracking shale can produce a lot of oil and gas in the right geological regions. It just usually costs more to get the oil and gas out of the rock than the fossil fuels are worth on the free market. Now, however, the much-lauded “shale revolution” is facing two big issues — the best rock has been drilled and few are eager to loan money to drill the remaining acreage.

E&E News recently highlighted what this reality means for Texas’s Eagle Ford shale play, where production is now 20 percent lower than at its peak in early 2015. For an oil basin that’s only been producing oil via fracking for just over a decade, that is a pretty grim number.

However, an analyst quoted by E&E News highlights the secret to making money while fracking for oil: Simply stop fracking.

“Generating free cash is easy: Stop spending on new wells,” said Raoul LeBlanc, vice president for North American unconventionals at IHS Markit. “The catch is that production will immediately move into steep decline in many cases.”

Ah, the catch. To generate cash while fracking requires companies to stop fracking and sell whatever oil they have left from rapidly declining wells. Because fracked wells decline quickly even when everything goes perfectly, if a producer isn’t constantly drilling new wells, then the oil production of a field drops off very quickly — the “steep decline” noted by LeBlanc. 

That’s exactly what happened in the Eagle Ford shale, an early darling of the fracking industry, and most of the top acreage in the Bakken shale play in North Dakota and Montana has already been drilled, and will likely see similar declines. …

Refer also to:

Chevron biting frac ‘n LNG dust? Bites 400 more staff in Pennsylvania after cutting 150 staff there in 2014. Frac’ing is going the way Arthur Berman said it would – down into the gutter with tens of billions of dollars in losses; Banks, investors, investment firms running for frac-free hills.

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