Written by an energy investment banker

Pressure Pumping Industry Introduction

Pressure pumpers provide hydraulic fracturing services for oil and gas exploration & production companies. Hydraulic fracturing (or fracking or fracing) increases the flow of oil and gas via improving conductivity of the hydrocarbon (oil & gas) zone within an oil or gas reservoir to the wellbore. Pressure pumpers are a subsegment of the oilfield services industry.

Today, unconventional oil and gas wells in shale, siltstone, and mudstone formations have increased the need for advanced technologies in hydraulic fracturing as well as higher frac intensity as the number of horizontal wells increase and E&P companies aim to drill longer wells and target multiple hydrocarbon zones.

Fracing is now a major business where unconventional oil and gas plays are being exploited, including Texas (Eagle Ford, Permian Midland, Permian Delaware, East Texas Haynesville), North Dakota (Williston Bakken / Three Forks), Colorado (Denver Julesberg), Arkansas, Louisiana, Pennsylvania (Marcellus), Alberta (Montney / Cardium / Duvernay) and British Columbia (Dry and liquids rich Montney).

Major Pressure Pumping Firms (Diversified and Pure Play)

• Schlumberger
  • (major diversified, best-in-class OFS firm, pressure pumping not core business)
• Halliburton
  • (major diversified, number 1 pressure pumper)
• Patterson UTI
  • (primary business is land drilling)
• RPC Inc.
  • (oilfield services holdco)
• NexTier Oilfield Solutions
  • (Merger of Keane and C&J Energy Services)
  • 3mm hydraulic fracturing horsepower
  • Cementing, coiled tubing
• Mammoth Energy Services
• ProPetro Holdings
• Superior Energy Services
• Calfrac

Pressure Pumping Industry Overview and Recent Developments

Largest pressure pumping markets are the U.S., Russia and Canada. The oil price downturn has created an oversupply situation in the pumping market, which is slightly offset by increasing activity and higher intensities in the fracking space as the trend is to achieve economies of scale by E&Ps drilling longer and deeper laterals. The oversupply situation is further amplified through the introduction of electric fracs.

Pressure pumping industry is seeing lower activity and weaker pricing. Companies are focused on cost management (layoffs and corporate restructuring) and paring back capex guidance. It is very dependent on E&P companies releasing their budgets, as their customers will dictate the spend.

Most E&P companies are undertaking a wait and see approach as energy as oil and gas prices remain muted and E&P stocks have been absolutely punished by the markets. Oil and gas as a percentage of broader energy markets has reached a record low while institutional investors are ignoring any company that does not have sufficient scale (100,000 boe/d of production for starters). This makes it much more complicated for companies with rapidly declining production as they have to see production cut back and think about cost cutting even more to make sure they are above water.

Mergers and acquisitions to consolidate the space makes sense for the E&Ps but may hurt oilfield services firms even more as these new combined firms may force their assets to compete for capital spending and slow down production.

To cut costs, many clients in the Lower 48 USA are self-sourcing frac sand and pumping chemicals required for hydraulic fracturing unconventional wells (shale, tight oil), taking away an area for pressure pumpers to upsell or bundle deals together and further eroding EBITDA margins.

Many large players in the market are reducing the horsepower out in the market to address a pressure pumping oversupply.

Pressure pumping companies have reduced overall supply to the market by 20%, parking and idling equipment and even permanently retiring swaths of their fleet. All companies are facing decisions around what to do with older equipment and maintenance programs.

Valuation for Pressure Pumpers

Valuation has dropped off substantially, with share prices for companies with some leverage dropping as much as 90% with possibly more pain to come. From an EV/EBITDA perspective, OFS can be extremely difficult to value for names not generating cash flow or who have stretched balance sheets. However, a Schlumberger or Haliburton do not have these problems.

OFS has always been the most volatile sub segment of an already volatile industry, with extreme torque to commodity prices. The new normal for what constitutes a levered oil field services company is now around 1x Debt/EBITDA. Companies with less debt than that may still have to tap into leveraged finance markets to raise debt with expensive coupons. In fact, as of today, it is extremely difficult for them to do even that given the general pessimism in the sector.

The current public market peers such as ProPetro Holding Corp, NexTier Oilfield Solutions, Liberty Oilfield Services, and Calfrac are trading from 2-4x EV to EBITDA. Big, diversified OFS like Haliburton are much better off at ¬7.5x EV/EBITDA. Halliburton and Schlumberger can also generate material free cash flow and can be valued on a discounted cash flow basis.

As the EBITDA generated has dropped off so precipitously, companies with minimum leverage are now actually considered to have high gearing at over 2x Debt/EBITDA.

During times with depressed valuations, investors will sometimes look to replacement value or liquidation value as a valuation method instead of DCF, trading multiples and especially precedent transactions. This means how much you would pay to replace or buy all the assets in terms of replacement value or what you would get in a liquidation process for the liquidation value.

The problem is that even though it costs money to build and buy from scratch, no one is willing to buy from scratch and existing fleets are cold stacked. As such, a large discount should be applied to this value in a normal market. Analysts may put an EV/Horsepower multiple as a proxy for replacement value (in terms of how much horsepower or HHP the fleet has). Analysts can also look at EV/Active Horsepower.

Market Risks for Pressure Pumper Stocks

Labour supply, weather, contract risks, balance sheet