A tough break for fracturing companies

Hydraulic fracturing companies are reeling as prices for their services slide, leading to crew layoffs and idle equipment in once booming shale gas fields.

Price tags on fracturing jobs have dropped as much as 20 percent from their peaks, pinching profits for businesses that ramped up their fleets during the boom, companies say.

The technology for getting natural gas out of dense shale rock has been instrumental in reviving fossil fuel production in the United States, even as it has raised environmental concerns in some quarters. Pressure pumping, the key component of the hydraulic fracturing process, flushes high-pressure mixtures of water, sand and chemicals thousands of feet underground to fracture the rock.

But the industry’s success has become its greatest challenge.

As shale gas production exploded in recent years, a flurry of small fracturing companies launched and the biggest players in the business rapidly expanded their crews.

“There was this wave of supply coming on, too much supply,” said Dennis Smith, director of corporate development for oil field services company Nabors Industries. “It created, overnight, a big excess of pumping capacity.”

In addition to that oversupply, demand for hydraulic fracturing in shale gas fields has been waning. Natural gas prices sank during the unusually warm winter, when the fuel is usually in high demand for home heating. Now some producers are closing their natural gas wells and abandoning shale gas fields.

“That exacerbated the day of reckoning for pressure pumping,” Smith said.

Nabors Industries idled four of the 10 pressure pumping crews it operated for short-term contracts. The crews were laid off and the equipment was mothballed. Smith said drops in pricing and job opportunities made it too costly to keep the crews on hand.

Other oil field services companies – most of which have headquarters or significant operations in Houston – are pulling back, too.

Patterson-UTI expects pressure pumping revenue to dive 20 per- cent this quarter. At Schlumberger, money budgeted to expand the North American pressure pumping division was cut and redirected to its international business.

Baker Hughes also reeled in plans to purchase more pressure pumping equipment, after the division started dragging down the company’s profit margins in North America.

“As we increased headcount and added capacity to address the growing market needs, we were not able to sufficiently utilize these resources,” CEO Martin Craighead said in a written statement about the company’s earnings early this year.

FTS International, which nearly doubled its hydraulic fracturing business over the previous two years, has halted all plans to build new pressure pumping equipment, said CEO Marc Rowland.

Writing on the wall

“Pretty much everything that was going right in 2011 has changed. Gas prices are at historic lows, customers are cutting back, (gas) rig counts have gone down nationally,” he said. “The writing was on the wall for us.”

There were 562 rigs operating in U.S. natural gas fields last week, compared with 870 a year earlier, according to the most recent data available from Baker Hughes.

Natural gas futures were down 2.8 cents at $2.467 per million British thermal units Friday in New York trading.

That’s a precipitous decline from its $13 per million Btu value in 2008, when hydraulic fracturing for natural gas was flourishing.

Companies have tried to escape the problem by moving their businesses into oil fields, where drilling activity is on the rise. But their woes have followed them there, said Simmons & Co. oil field services analyst John Daniel.

Saturated markets

The migration of hydraulic fracturing companies into areas rich in high-demand crude oil and natural gas liquids has saturated those markets, too. The number of companies operating in the Permian Basin in West Texas has more than doubled in recent years, intensifying competition and driving down the price for hydraulic fracturing, Daniel said.

“Every time you go out there, more companies are opening up offices,” he said. “Now, if you want to complete a well, you can go out and call a bunch of companies and get a quote.”

Further, moving hydraulic fracturing crews across states is expensive and time consuming. Crews have to acclimate to new reservoirs. Equipment stops generating revenue while it’s being moved. And some burgeoning oil fields are lacking the workers, hotels and restaurants that companies need to set up shop, said Rowland of FTS.

“The logistics have not been easy at all,” he said.

Hydraulic fracturing for liquid fuels has been less lucrative for the company. In the Eagle Ford Shale, a liquids-rich play in South Texas, each round of well fracturing commands about $130,000, he said. By comparison, a job in the predominantly natural gas Haynesville Shale on the Louisiana border got about $300,000 per round at its peak.

“Smaller companies will have trouble staying in business,” Rowland said.

Quick reactions

As companies halt new equipment orders and the oversupply moderates, companies are hoping the market will start to rebound.

“It’s a little early to say how everything is going to work out,” Smith said. “But the industry is reacting pretty quickly to minimize the impact.”

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